eBay 2012 Annual Report Download - page 80

We calculated the fair value of each restricted stock award based on our stock price on the date of grant. We calculated the fair value of
each stock option award on the date of grant using the Black-Scholes option pricing model. The determination of fair value of stock option
awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of additional
variables described below. The use of a Black-Scholes model requires extensive actual employee exercise behavior data and a number of
assumptions, including expected life, expected volatility, risk-free interest rate and dividend yield. As a result, future stock-based compensation
expense may differ from our historical amounts. The weighted-average grant-date fair value of stock options granted during 2012 , 2011 and
2010 was $11.21 , $9.87 and $6.77 per share, respectively, using the Black-Scholes model with the following weighted-average assumptions:
Our computation of expected volatility for 2012 , 2011 and 2010 was based on a combination of historical and market-based implied
volatility from traded options on our stock. Our computation of expected life was determined based on historical experience of similar awards,
giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The
interest rate for periods within the contractual life of the award was based on the U.S. Treasury yield curve in effect at the time of grant. The
estimation of awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current
estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when
estimating forfeitures, including employee class and historical experience.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exposure
We have significant operations internationally that are denominated in foreign currencies, primarily the Euro, British pound, Korean won
and Australian dollar, subjecting us to foreign currency risk which may adversely impact our financial results. We transact business in various
foreign currencies and have significant international revenues as well as costs. In addition, we charge our international subsidiaries for their use
of intellectual property and technology and for certain corporate services provided by eBay and by PayPal. Our cash flow, results of operations
and certain of our intercompany balances that are exposed to foreign exchange rate fluctuations may differ materially from expectations and we
may record significant gains or losses due to foreign currency fluctuations and related hedging activities.
We have a foreign exchange exposure management program that aims to identify material foreign currency exposures, to manage these
exposures, and to reduce the potential effects of currency fluctuations on our reported consolidated cash flows and results of operations through
the purchase of foreign currency exchange contracts. These foreign currency exchange contracts are accounted for as derivative instruments. For
additional details related to our derivative instruments, please see “Note 8 - Derivative Instruments” to the consolidated financial statements
included in this report.
Interest Rate Risk
The primary objective of our investment activities is to preserve principal while at the same time improving yields without significantly
increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term and long-term investments in a variety of
asset types, including bank deposits, money market funds, government bonds, and corporate debt securities. As of December 31, 2012 ,
approximately 55% of our total cash and investment portfolio was held in cash and cash equivalents. As such, changes in interest rates will
impact interest income. As discussed below, fixed rate securities may have their fair market value adversely affected due to a rise in interest
rates, and we may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates.
Additionally, changes in interest rates will impact interest expense on borrowings under our revolving credit facility, which bear interest at
floating rates, and the interest rate on any commercial paper borrowings we make and on any debt securities we issue in the future and,
accordingly, will impact interest expense or cost of net revenues (or both).
As of December 31, 2012 , we held no direct investments in auction rate securities, collateralized debt obligations, structured investment
vehicles or mortgage-backed securities. For additional details related to our investment activities, please see "Note 6 - Investments" to the
consolidated financial statements included in this report.
76
Year Ended December 31,
2012 2011 2010
Risk-free interest rate
0.7
%
1.2
%
1.4
%
Expected life (in years)
4.0
3.8
3.4
Dividend yield
—
%
—
%
—
%
Expected volatility
38
%
38
%
37
%