XML 85 R20.htm IDEA: XBRL DOCUMENT v2.4.0.6
Derivatives and Hedging
3 Months Ended
Mar. 31, 2012
Derivatives and Hedging  
Derivatives and Hedging

13.  Derivatives and Hedging

 

The Company is exposed to certain market risks, including changes in foreign currency exchange rates and interest rates. To manage the risk related to these exposures, the Company enters into various derivative instruments that reduce these market risks by creating offsetting exposures. The Company does not enter into derivative instruments for trading or speculative purposes.

 

Foreign Exchange Risk Management

 

The Company and its subsidiaries are exposed to foreign exchange risk when they receive revenues, pay expenses, or enter into intercompany loans denominated in a currency that differs from their functional currency. The Company uses foreign exchange derivatives, typically forward contracts, options and cross currency swaps, to reduce its overall exposure to the effects of currency fluctuations on cash flows. These exposures are hedged, on average, for less than two years; however, in limited instances, the Company has hedged certain exposures up to five years in the future.

 

The Company also uses foreign exchange derivatives, typically forward contracts and options, to hedge its net investments in foreign operations for up to two years in the future.

 

The Company also uses foreign exchange derivatives, typically forward contracts and options, to manage the currency exposure of the Company’s global liquidity profile for one year in the future. These derivatives are not accounted for as hedges, and changes in fair value are recorded each period in Other general expenses in the Condensed Consolidated Statements of Income.

 

Interest Rate Risk Management

 

The Company holds variable-rate short-term brokerage and other operating deposits. The Company uses interest rate derivatives, typically swaps, to reduce its exposure to the effects of interest rate fluctuations on the forecasted interest receipts from these deposits for up to two years in the future.

 

Certain derivatives also give rise to credit risks from the possible non-performance by counterparties.  The credit risk is generally limited to the fair value of those contracts that are favorable to the Company. The Company has limited its credit risk by using International Swaps and Derivatives Association (“ISDA”) master agreements, collateral and credit support arrangements, entering into non-exchange-traded derivatives with highly-rated major financial institutions and by using exchange-traded instruments. The Company monitors the credit-worthiness of, and exposure to, its counterparties. As of March 31, 2012, all net derivative positions were free of credit risk contingent features. In addition, the Company did not receive or pledge collateral for any derivatives as of March 31, 2012.

 

The notional and fair values of derivative instruments are as follows (in millions):

 

 

 

Notional Amount

 

Derivative Assets (1)

 

Derivative Liabilities (2)

 

 

 

March 31,
2012

 

December 31,
2011

 

March 31,
2012

 

December 31,
2011

 

March 31,
2012

 

December 31,
2011

 

Derivatives accounted for as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

552

 

$

702

 

$

18

 

$

16

 

$

 

$

 

Foreign exchange contracts

 

1,377

 

1,297

 

169

 

140

 

205

 

188

 

Total

 

1,929

 

1,999

 

187

 

156

 

205

 

188

 

Derivatives not accounted for as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

228

 

246

 

1

 

1

 

1

 

1

 

Total

 

$

2,157

 

$

2,245

 

$

188

 

$

157

 

$

206

 

$

189

 

 

(1) Included within Other assets

(2) Included within Other liabilities

 

The amounts of derivative gains (losses) recognized in the Condensed Consolidated Financial Statements for the three months ended March 31, 2012 and 2011 are as follows (in millions):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Gain (Loss) recognized in Accumulated Other Comprehensive Loss:

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

Interest rate contracts

 

$

 

$

(2

)

Foreign exchange contracts

 

2

 

 

Total

 

$

2

 

$

(2

)

Foreign net investment hedges:

 

 

 

 

 

Foreign exchange contracts

 

$

(10

)

$

(13

)

Gain (Loss) reclassified from Accumulated Other Comprehensive Loss into income (effective portion):

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

Interest rate contracts (1)

 

$

 

$

 

Foreign exchange contracts (2)

 

(8

)

2

 

Total

 

$

(8

)

$

2

 

Foreign net investment hedges:

 

 

 

 

 

Foreign exchange contracts

 

$

 

$

 

 

(1) Included within Fiduciary investment income and Interest expense

(2) Included within Other general expenses and Interest expense

 

 

 

Three months ended March 31,

 

 

 

Amount of Gain (Loss)
Recognized in Income on
Derviative (1)

 

Amount of Gain (Loss)
Recognized in Income on Related
Hedged Item (2)

 

 

 

2012

 

2011

 

2012

 

2011

 

Fair value hedges:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

2

 

$

(7

)

$

(2

)

$

8

 

 

(1) Relates to fixed rate debt

(2) Included in Interest expense

 

It is estimated that approximately $20 million of pretax losses currently included within Accumulated other comprehensive loss will be reclassified into earnings in the next twelve months.

 

The amount of gain (loss) recognized in income on the ineffective portion of derivatives for the three months ended March 31, 2012 and 2011 was not material.

 

The Company recognized a gain of $5 million and a loss of  $1 million during the three months ended March 31, 2012 and 2011, respectively, related to foreign exchange derivatives not designated or qualifying as hedges. These amounts were recorded in Other general expenses in the Condensed Consolidated Statements of Income.