| Foreign Currency Risk
Most
of the Company's sales are denominated in U.S. dollars.
In addition, a substantial portion of the Company's
costs is incurred in dollars. The Company's management
believes that the dollar is the primary currency of
the economic environment in which the Company and its
subsidiaries operate, and thus the dollar is their functional
and reporting currency. Accordingly, monetary accounts
maintained in currencies other than the dollar (principally
cash and cash equivalents, short-term deposits and liabilities)
are remeasured into US dollars using the foreign exchange
rate at the balance sheet date. Operational accounts
and non-monetary balance sheet accounts are measured
and recorded at the rate in effect at the date of the
transaction. All transaction gains and losses of the
remeasurement of monetary balance sheet items are reflected
in the statement of income as financial income or expenses,
as appropriate.
The
Company hedges the exposure of assets and anticipated
revenues denominated in the Japanese yen with forward
and option contracts. The Company monitors its foreign
currency exposures daily to maximize the overall effectiveness
of its foreign currency hedge positions. If these derivatives
meet the definition of a hedge and is so designated,
depending on the nature of the hedge, changes in the
fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities
or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a
derivative's change in fair value is recognized in earnings.
In
order to hedge portions of its risk of overall changes
in cash flows resulting from forecasted export sales
over the next year, the Company has instituted a foreign
currency cash flow hedging program with zero cost-collar
contracts. As of December 31, 2001, the Company expects
to reclassify $2,909 thousands of unrealized gains on
hedging derivative instruments, from accumulated other
comprehensive income to earnings during the next 12
months, in line with actual export sales. Also, the
Company enters into forward exchange contracts designated
to hedge the fair value of certain foreign currency
denominated customers' balances.
As
of December 31, 2001, the Company's management believes
that because the above transactions are carried out
with well-established institutions, liabilities owing
to the Company will be fulfilled. Total outstanding
transactions to sell/purchase U.S. dollars in exchange
for the Japanese yen were in the amount of $ 9.1 million.
The above transactions were for a period of three months.
As of December 31, December 2001, the Company accumulated
other comprehensive income of $2.9 million with zero
cost-collar contracts.
Interest Rate Risk
The
Company's exposure to market risk for changes in interest
rates relates primarily to the Company's investment
in marketable securities. The Company's marketable securities
are comprised of U.S. and European government and corporate
debt instruments. The fair value of the Company's long
and short-term securities is based upon their market
values as of December 31, 2001.
The
Company has entered into forward rate agreements ("FRA",)
designated as a cash flow hedge that effectively convert
a portion of its floating rate investments to a fixed
rate basis for a 12 month period beginning one year
after the date of the agreement, thus reducing the impact
of the interest rate changes on future interest income.
As of December 31, 2001, approximately $125 million
of the Company's outstanding short-term debt had its
interest income designated as hedged forecasted transactions
with no material effect on the Company's financial position
or operating results.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
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