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Market risk generally represents
the risk of loss that may result from the potential
change in the value of a financial instrument as
a result of fluctuations in interest rates and market
prices. We have established policies, procedures
and internal processes governing our management
of market risks in the normal course of our business
operations.
We seek to control the risks associated with our
client activities by requiring clients to maintain
margin collateral in compliance with regulatory
and internal guidelines. We monitor required margin
levels daily and, pursuant to such guidelines, require
our clients to deposit additional collateral, or
to reduce positions, when necessary.
As a fundamental part of our brokerage business,
we hold short-term interest earning assets, mainly
funds required to be segregated in compliance with
federal regulations for clients. These funds totaled
$5.7 billion at September 27, 2002 and $2.0 billion
at September 28, 2001. We invest these funds primarily
in short-term fixed-rate U.S. Treasury Bills and
repurchase agreements. Our interest earning assets
are financed primarily by short-term interest bearing
liabilities, totaling $6.4 billion at September
27, 2002 and $2.8 billion at September 28, 2001,
in the form of client cash balances. We earn a net
interest spread on the difference between amounts
earned on client margin loans and amounts paid on
client credit balances. Since we establish the rate
paid on client cash balances, a substantial portion
of our interest rate risk is under our direct management.
At September 27, 2002, we had $47.6 million of convertible
subordinated notes outstanding, which bear interest
at a fixed rate of 5.75 percent. At September 28,
2001, we had $70.1 million of interest bearing indebtedness
outstanding, consisting of $47.6 million of convertible
subordinated notes and $22.5 million under our revolving
credit agreement, which bears interest at a floating
rate.
We hold a marketable equity security, which is recorded
at fair value of $31.9 million ($19.4 million net
of tax) at September 27, 2002 and has exposure to
market price risk. The same security was recorded
at fair value of $61.0 million ($36.9 million net
of tax) at September 28, 2001. The potential loss
in fair value resulting from a hypothetical 10 percent
adverse change in prices quoted by the stock exchanges
was approximately $3.2 million at September 27,
2002. Actual results may differ.
Our revenues and financial instruments are denominated
in U.S. dollars, and we generally do not invest
in derivative financial instruments or derivative
commodity instruments. At September 27, 2002 and
September 28, 2001, we had an equity index swap
arrangement with a notional amount of $15.6 million
for the purpose of hedging our obligation under
our deferred compensation plan for our CEO. Changes
in the fair value of this instrument are offset
by changes in our obligation to our CEO. |
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