Microsoft 2012 Annual Report Download - page 54

NOTE 5 — DERIVATIVES
We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, and credit; to
enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include
reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our
derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment. All notional
amounts presented below are measured in U.S. currency equivalents.
Foreign Currency
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign
currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions. Option and
forward contracts are used to hedge a portion of forecasted international revenue for up to three years in the future and
are designated as cash flow hedging instruments. Principal currencies hedged include the euro, Japanese yen, British
pound, and Canadian dollar. As of June 30, 2012 and June 30, 2011, the total notional amounts of these foreign
exchange contracts sold were $6.7 billion and $10.6 billion, respectively.
Foreign currency risks related to certain non-U.S. dollar denominated securities are hedged using foreign exchange
forward contracts that are designated as fair value hedging instruments. As of June 30, 2012 and June 30, 2011, the total
notional amounts of these foreign exchange contracts sold were $1.3 billion and $572 million, respectively.
Certain options and forwards not designated as hedging instruments are also used to manage the variability in exchange
rates on accounts receivable, cash, and intercompany positions, and to manage other foreign currency exposures. As of
June 30, 2012, the total notional amounts of these foreign exchange contracts purchased and sold were $3.6 billion and
$7.3 billion, respectively. As of June 30, 2011, the total notional amounts of these foreign exchange contracts purchased
and sold were $4.3 billion and $7.1 billion, respectively.
Equity
Securities held in our equity and other investments portfolio are subject to market price risk. Market price risk is managed
relative to broad-based global and domestic equity indices using certain convertible preferred investments, options,
futures, and swap contracts not designated as hedging instruments. From time to time, to hedge our price risk, we may
use and designate equity derivatives as hedging instruments, including puts, calls, swaps, and forwards. As of June 30,
2012, the total notional amounts of designated and non-designated equity contracts purchased and sold were $1.4 billion
and $982 million, respectively. As of June 30, 2011, the total notional amounts of designated and non-designated equity
contracts purchased and sold were $1.1 billion and $860 million, respectively.
Interest Rate
Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We
manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-
based fixed-income indices using exchange-traded option and futures contracts and over-the-counter swap and option
contracts, none of which are designated as hedging instruments. As of June 30, 2012, the total notional amounts of fixed-
interest rate contracts purchased and sold were $3.2 billion and $1.9 billion, respectively. As of June 30, 2011, the total
notional amounts of fixed-interest rate contracts purchased and sold were $2.3 billion and $697 million, respectively.
In addition, we use “To Be Announced” forward purchase commitments of mortgage-backed assets to gain exposure to
agency mortgage-backed securities. These meet the definition of a derivative instrument in cases where physical delivery
of the assets is not taken at the earliest available delivery date. As of June 30, 2012 and 2011, the total notional derivative
amount of mortgage contracts purchased were $1.1 billion and $868 million, respectively.