AAPL is based out of USA and operates in the followinggeographical regions: Americas, Europe, Greater China, Japan and Rest of AsiaPacific.
In figure 4.1 we can seethat majority of AAPL’s sales takes place international. From its 10K we see thatAAPL’s $233 billion in net sales is contributed, 35 percent from domestic and65 percent by international sales.
Because of significant exposure tointernational operations, any fluctuation in exchange rate has substantialaffect to AAPL’s financial condition including gross margin. AAPL has a strong global presence its suppliers arelocated all over the world and AAPL sells its products all over the world aswell. Now due to the nature of its business, AAPL is impacted when a foreigncurrency weakens relative to the US dollar and vice versa. Weakening of foreigncurrency relative to U.S. dollar adversely affects its foreigncurrency-denominated sales as a result AAPL may adjust International productprices. On the contrary strengthening of foreign currency relative to U.S.
dollar implies AAPL benefits foreign currency-denominated sales. However italso increases cost of product components denominated in those currencies, thusadversely affecting gross margin. Some of the major currencies that the company faceexchange rate risk on includes the Chinese Yuan (CNY), Japanese Yen (JPY),European Dollar (EUR), Hong Kong Dollar (HKD), Taiwan Dollar (TWD) andAustralian Dollar (AUD). In figure 4.
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2,we can see how the U.S. dollar stand against the CNY, JPY, EUR, HKD, TWD andAUD. Other than EUR which stands stern at $1 for € 0.86 all other currenciespose minimum risk considering their current exchange relative to US dollar. From the 10K we learn that to offset its current risk,AAPL enters into foreign currency forward and option contracts with financialinstitutions to offset foreign exchange risks. AAPL uses US dollar as itsfunctional currency. In figure 4.
3 wecan see the FX hedges AAPL enters into to offset its exposure to foreignexchange risk. As we can see on the 10K, AAPL uses derivative instruments, suchas foreign currency forward and option contracts, to offset its exposures tofluctuations in FX rates. We also see that the company is a net receiver ofcurrencies other than the U.S. dollar, so to help protect gross margins fromfluctuations in foreign currency exchange rates, some of AAPL’s subsidiarieswhose functional currency is the U.S. dollar hedges portion of forecastedforeign currency revenue. We also find that those subsidiaries whose functionalcurrency is not the U.
S. dollar and who sell in local currencies, hedge portionof forecasted inventory purchases which are not denominated in thesubsidiaries’ functional currencies. AAPL typically hedges portions of itsforecasted foreign currency exposure associated with revenue and inventorypurchases, typically for up to 12 months.
Furthermore from its 10K we identify that to helpprotect any investment in a foreign operation from adverse changes in foreigncurrency exchange rates, AAPL also enters into foreign currency forward andoption contracts to offset the changes in the carrying amounts of theseinvestments due to fluctuations in foreign currency exchange rates. Figure 4.4 shows the AAPL’s gains and lossesin futures contract.
