cisco-annual-report-2021

The effect on the Consolidated Statements of Operations of derivative instruments not designated as hedges is summarized as
follows (in millions):
Derivatives Not Designated as Hedging Instruments
Line Item in Statements of Operations
GAINS (LOSSES) FOR
THE YEARS ENDED
July 31,
2021
Foreign currency derivatives . . . . . . . . . . . . . . . . . . . . . . . . Other income (loss), net $ 2 $ (5) $ (60)
Total return swaps—deferred compensation . . . . . . . . . . . . Operating expenses and other 157 15 5
Equity derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (loss), net 20 9 3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 179 $ 19 $ (52)
The notional amounts of our outstanding derivatives are summarized as follows (in millions):
July 31, 2021 July 25, 2020
Foreign currency derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,139 $ 4,315
Interest rate derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 2,500
Total return swaps—deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 730 580
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,869 $ 7,395
July 25,
2020
July 27,
2019
(b)
Offsetting of Derivative Instruments
We present our derivative instruments at gross fair values in the Consolidated Balance Sheets. However, our master netting
and other similar arrangements with the respective counterparties allow for net settlement under certain conditions, which are
designed to reduce credit risk by permitting net settlement with the same counterparty. As of July 31, 2021 and July 25, 2020, the
potential effects of these rights of set-off associated with the derivative contracts would be a reduction to both derivative assets
and derivative liabilities of $17 million and $10 million, respectively.
To further limit credit risk, we also enter into collateral security arrangements related to certain derivative instruments whereby
cash is posted as collateral between the counterparties based on the fair market value of the derivative instrument. Under these
collateral security arrangements, the net cash collateral received as of July 31, 2021 and July 25, 2020 was $109 million and $173
million, respectively. Including the effects of collateral, this results in a net derivative liability of $3 million and a net derivative
asset of $8 million as of July 31, 2021 and July 25, 2020, respectively.
(c)
Foreign Currency Exchange Risk
We conduct business globally in numerous currencies. Therefore, we are exposed to adverse movements in foreign currency
exchange rates. To limit the exposure related to foreign currency changes, we enter into foreign currency contracts. We do not
enter into such contracts for speculative purposes.
We hedge forecasted foreign currency transactions related to certain revenues, operating expenses and service cost of sales
with currency options and forward contracts. These currency options and forward contracts, designated as cash flow hedges,
generally have maturities of less than 24 months. The derivative instrument’s gain or loss is initially reported as a component of
AOCI and subsequently reclassified into earnings when the hedged exposure affects earnings. During the fiscal years presented,
we did not discontinue any cash flow hedges for which it was probable that a forecasted transaction would not occur.
We enter into foreign exchange forward and option contracts to reduce the short-term effects of foreign currency fluctuations
on assets and liabilities such as foreign currency receivables, long-term customer financings and payables. These derivatives
are not designated as hedging instruments. Gains and losses on the contracts are included in other income (loss), net, and
substantially offset foreign exchange gains and losses from the remeasurement of intercompany balances, other current assets,
or liabilities denominated in currencies other than the functional currency of the reporting entity.
We hedge certain net investments in our foreign operations with forward contracts to reduce the effects of foreign currency
fluctuations on our net investment in those foreign subsidiaries. These derivative instruments generally have maturities of up
to six months.
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