DERIVATIVE INSTRUMENTS

6 Months Ended

Jun. 30, 2011

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

6.  DERIVATIVE INSTRUMENTS

We use derivatives to partially offset our business exposure to foreign currency exchange risk. We enter into foreign currency exchange contracts to hedge our anticipated operating commitments that are denominated in foreign currencies.  The contracts cover periods commensurate with expected exposure, generally three to nine months, and are principally unsecured foreign exchange contracts.  The market risk exposure is essentially limited to risk related to currency rate movements.  We operate in Canada, the Philippines and Costa Rica.  The functional currencies of our Canadian and Philippine operations are the Canadian dollar and the Philippine peso, respectively, which are used to pay labor and other operating costs in those countries. However, our client contracts primarily generate revenues which are paid to us in U.S. dollars.  In Costa Rica, our functional currency is the U.S. dollar and the majority of our costs are denominated in U.S. dollars.  We have elected to follow cash flow hedge accounting in order to associate the results of the hedges with forecasted future expenses.  The current mark-to-market gain or loss is recorded in accumulated other comprehensive income (“AOCI”) as a component of stockholders’ equity and will be re-classified to operations as the forecasted expenses are incurred, typically within one year.  During the three and six months ended June 30, 2011 and 2010, our cash flow hedges were highly effective and there were no amounts charged to the Condensed Consolidated Statements of Operations for hedge ineffectiveness.

During the three and six months ended June 30, 2011, we entered into forward contracts with respect to the Canadian dollar for a notional amount of 13,100 Canadian dollars to hedge our foreign currency risk with respect to labor costs in Canada. The following table shows the notional principal of our derivative instruments as of June 30, 2011:

	Currency	Notional Principal
Instruments qualifying as accounting hedges:
Foreign exchange contracts	Canadian dollar	CDN	11,100
Foreign exchange contracts	Philippine peso	PHP	804,000

The Canadian dollar foreign exchange contracts are to be delivered periodically through June 2012 at a purchase price of approximately $11,450, and the Philippine peso foreign exchange contracts are to be delivered periodically through December 2011 at a purchase price of approximately $18,452.  As of June 30, 2011, we have not entered into any arrangements to hedge our exposure to fluctuations in the Costa Rican colon relative to the U.S. dollar.  We expect unrealized gains and losses reported in AOCI will be reclassified to earnings during the next twelve months.  The estimates of fair value are based on applicable and commonly used pricing models and prevailing financial market information as of June 30, 2011.  Refer to Note 7, “Fair Value Measurements,” of this Form 10-Q, for additional information on the fair value measurements for all assets and liabilities, including derivative assets and derivative liabilities, that are measured at fair value in the Condensed Consolidated Financial Statements.

The following table shows our derivative instruments measured at gross fair value as reflected in the Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010:

	As of
	June 30, 2011		December 31, 2010
Derivative assets:
Foreign exchange contracts	$	99	$	1,078
Derivative liabilities:
Foreign exchange contracts	$	72	$	91

The following table shows the effect of our derivative instruments designated as cash flow hedges in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and  2010:

	Three Months Ended
	June 30, 2011					June 30, 2010
	Loss Recognized in AOCI, net of tax			Gain Reclassified from AOCI into Income		Loss Recognized in AOCI, net of tax			Gain Reclassified from AOCI into Income		Location of Gain Reclassified from AOCI into Income
Cash flow hedges:
Foreign exchange contracts	$	(1,165	)	$	594	$	(1,727	)	$	480	Cost of services

	Six Months Ended
	June 30, 2011					June 30, 2010
	Loss Recognized in AOCI, net of tax			Gain Reclassified from AOCI into Income		Loss Recognized in AOCI, net of tax			Gain Reclassified from AOCI into Income		Location of Gain Reclassified from AOCI into Income
Cash flow hedges:
Foreign exchange contracts	$	(2,257	)	$	1,298	$	(1,400	)	$	871	Cost of services