Following are excerpts from the footnotes to IBM Corporation’s 2013 financial statements:

Required

a. Explain how IBM uses forward contracts to reduce currency risk related to anticipated royalties and cost transactions.

b. If the hedges described above are net forward sale contracts, does IBM anticipate a net inflow or outflow of foreign currency related to its hedged royalty and cost transactions? Explain.

c. Again assuming the hedges are net forward sale contracts, on average did the U.S. dollar strengthen or weaken with respect to the currencies hedged in 2013 and 2012? How do you know?

d. For these cash flow hedges, where and when will the reclassification to income be recorded?

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The company's operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company's non-U.S. subsidiaries and with the parent company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. At December 31, 2013 and 2012, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net losses of $252 million and of $138 million (before taxes), respectively, in AOCI. Within these amounts $166 million and $79 million of losses, respec- tively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.