Cisco 2011 Annual Report Download - page 84

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Foreign Currency Exchange Risk
Our foreign exchange forward and option contracts are summarized as follows (in millions):
July 30, 2011 July 31, 2010
Notional
Amount Fair Value
Notional
Amount Fair Value
Forward contracts:
Purchased ............................................... $3,722 $ 9 $3,368 $26
Sold .................................................... $1,225 $(10) $ 878 $ (7)
Option contracts:
Purchased ............................................... $1,547 $ 63 $1,582 $56
Sold .................................................... $1,577 $(12) $1,507 $ (6)
We conduct business globally in numerous currencies. The direct effect of foreign currency fluctuations on sales has not been
material because our sales are primarily denominated in U.S. dollars. However, if the U.S. dollar strengthens relative to other
currencies, such strengthening could have an indirect effect on our sales to the extent it raises the cost of our products to non-U.S.
customers and thereby reduces demand. A weaker U.S. dollar could have the opposite effect. However, the precise indirect effect
of currency fluctuations is difficult to measure or predict because our sales are influenced by many factors in addition to the impact
of such currency fluctuations.
Approximately 70% of our operating expenses are U.S.-dollar denominated. Foreign currency fluctuations, net of hedging,
increased our operating expenses by approximately 0.3% in fiscal 2011 compared with fiscal 2010 and 0.2% in fiscal 2010
compared with fiscal 2009. To reduce variability in operating expenses and service cost of sales caused by non-U.S.-dollar
denominated operating expenses and costs, we hedge certain foreign currency forecasted transactions with currency options and
forward contracts. These hedging programs are not designed to provide foreign currency protection over long time horizons. In
designing a specific hedging approach, we consider several factors, including offsetting exposures, significance of exposures, costs
associated with entering into a particular hedge instrument, and potential effectiveness of the hedge. The gains and losses on
foreign exchange contracts mitigate the effect of currency movements on our operating expenses and service cost of sales.
We also enter into foreign exchange forward and option contracts to reduce the short-term effects of foreign currency fluctuations
on receivables, investments, and payables that are denominated in currencies other than the functional currencies of the entities.
The market risks associated with these foreign currency receivables, investments, and payables relate primarily to variances from
our forecasted foreign currency transactions and balances. Our forward and option contracts generally have the following
maturities:
Maturities
Forward and option contracts—forecasted transactions related to operating expenses and service cost of sales . . Up to 18 months
Forward contracts—current assets and liabilities ................................................... Upto3months
Forward contracts—net investments in foreign subsidiaries .......................................... Upto6months
Forward contracts—long-term customer financings ................................................. Upto2years
Forward contracts—investments ................................................................ Upto2years
We do not enter into foreign exchange forward or option contracts for trading purposes.
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