American Express 2001 Annual Report Download - page 65

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axp_63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HEDGE OF NET INVESTMENT IN FOREIGN OPERATIONS
The company designates foreign currency derivatives as hedges of net investments in certain foreign operations. For these hedges
unrealized gains and losses are recorded in the cumulative translation adjustment account included in other comprehensive income
(loss), whereas the related amounts due to or from counterparties are included in other liabilities or other assets.
During 2001, the change in the net unrealized amount was immaterial.
DERIVATIVES NOT DESIGNATED AS HEDGES UNDER SFAS NO. 133
The company has economic hedges that either do not qualify or are not designated for hedge accounting treatment under
SFAS No. 133. In addition, AEB enters into derivative contracts both to meet the needs of its clients and, to a limited extent, for
trading purposes, including taking proprietary positions. For the year ended December 31, 2001, the net effect on earnings of
accounting for the net changes in fair value of the following undesignated derivatives under SFAS No. 133 compared with prior
rules was immaterial.
❚Foreign currency transaction exposures are economically hedged, where practical, through foreign currency contracts. Foreign
currency contracts involve the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified
date. Such foreign currency forward contracts entered into by the company generally mature within one year. In addition, for
selected major overseas markets, the company uses foreign currency forward contracts with maturities generally not exceeding
one year to hedge future operating results. In the latter parts of 2001 and 2000, foreign currency forward sales (with notional
amounts of $323 million and $386 million, respectively) and, in the latter part of 2000, foreign currency forward purchases (with
notional amounts of $92 million) were contracted to manage a portion of anticipated cash flows from operations in major
overseas markets for the subsequent year. The impact of these activities was not material.
❚AEFA uses interest rate caps, swaps and floors to protect the margin between the interest rates earned on investments and the
interest rates credited to holders of certain investment certificates and fixed annuities.
❚Certain of AEFA’s annuity and investment certificate products have returns tied to the performance of equity markets. These
elements are considered derivatives under SFAS No. 133. AEFA manages this equity market risk by entering into options
and futures with offsetting characteristics.
❚Certain of the company’s equity investments are in the form of warrants. Some of these warrants are deemed to be derivative
financial instruments.
See Note 7 for further information regarding the company’s use of interest rate products related to short- and long-term debt
obligations.
Note 11 ❚OFF-BALANCE SHEET ITEMS
The company’s off-balance sheet financial instruments principally relate to extending credit to satisfy the needs of its clients. The
contractual amount of these instruments represents the maximum potential credit risk, assuming the contract amount is fully uti-
lized, the counterparty defaults and collateral held is worthless. Management does not expect any material adverse consequence
to the company’s financial position to result from these contracts.
December 31, (Millions) 2001 2000
Unused credit available to Cardmembers $ 112,059 $ 91,667
Loan commitments and other lines of credit $ 1,128 $ 1,312
Bank standby letters of credit and bank guarantees $ 845 $ 1,100
Bank commercial and other bank letters of credit $ 260 $ 500