Dell 2002 Annual Report Download - page 28

Table of Contents
originations of financing arrangements. Currently, Dell does not anticipate any such interruption in DFS operations.
DFS was formed in 1998 by Dell and Newcourt Credit Group, Inc. ("Newcourt"). In fiscal 2000, Newcourt was acquired by CIT and in fiscal 2002, CIT was
acquired by Tyco International, Inc. ("Tyco"). In July 2002, Tyco spun off CIT as an independent company and, as a result, CIT became Dell's partner in
DFS.
Market Risk
Dell is exposed to a variety of risks, including foreign currency exchange rate fluctuations and changes in the market value of its investments. In the normal
course of business, Dell employs established policies and procedures to manage these risks.
Foreign Currency Hedging Activities
Dell's objective in managing its exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations on earnings and cash
flows associated with foreign currency exchange rate changes. Accordingly, Dell utilizes foreign currency option contracts and forward contracts to hedge its
exposure on forecasted transactions and firm commitments in most of the foreign countries in which Dell operates. The principal currencies hedged during
fiscal 2003 were the Euro, British Pound, Japanese Yen, and Canadian Dollar. Dell monitors its foreign currency exchange exposures to ensure the overall
effectiveness of its foreign currency hedge positions. However, there can be no assurance Dell's foreign currency hedging activities will substantially offset
the impact of fluctuations in currency exchange rates on its results of operations and financial position.
Based on Dell's foreign currency cash flow hedge instruments outstanding at January 31, 2003, Dell estimates a maximum potential one-day loss in fair value
of approximately $30 million, using a Value-at-Risk ("VAR") model. The VAR model estimates were made assuming normal market conditions and a 95%
confidence level. Dell used a Monte Carlo simulation type model that valued its foreign currency instruments against a thousand randomly generated market
price paths. Forecasted transactions, firm commitments, fair value hedge instruments, and accounts receivable and payable denominated in foreign currencies
were excluded from the model. The VAR model is a risk estimation tool, and as such, is not intended to represent actual losses in fair value that will be
incurred by Dell. Additionally, as Dell utilizes foreign currency instruments for hedging forecasted and firmly committed transactions, a loss in fair value for
those instruments is generally offset by increases in the value of the underlying exposure. As a result of Dell's hedging activities, foreign currency fluctuations
did not have a material impact on Dell's results of operations and financial position during fiscal 2003, 2002, and 2001.
Cash and Investments
At January 31, 2003, Dell had $9.9 billion of total cash and investments (including investments in equity securities discussed below), all of which are stated at
fair value. Dell's investment policy is to manage its total cash and investments balances to preserve principal and liquidity while maximizing the return on the
investment portfolio through the full investment of available funds. Dell diversifies its investment portfolio by investing in multiple types of investment-grade
securities and through the use of third-party investment managers. Based on Dell's investment portfolio and interest rates at January 31, 2003, a 100 basis
point increase or decrease in interest rates would result in a decrease or increase of approximately $100 million, respectively, in the fair value of the
investment portfolio. Changes in interest rates may affect the fair value of the investment portfolio; however, Dell will not recognize such gains or losses
unless the investments are sold.
At January 31, 2003, the fair value of investments in equity securities of privately and publicly held technology companies was $196 million. These
investments were made in order to enhance and
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