American Express 2005 Annual Report Download - page 86

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Currently, the longest period of time over which
the Company is hedging exposure to the variability
in future cash flows is approximately 5 years, which
is related to long-term debt. For 2005, 2004 and 2003,
there were no gains or losses on derivative transactions
or portions thereof that were excluded from the
assessment of hedge effectiveness. The total fair value,
excluding accruals, of derivative product assets and
liabilities designated as cash flow hedges was $226 mil-
lion and $5 million, respectively, as of December 31,
2005 and $90 million and $266 million, respectively,
as of December 31, 2004.
Fair Value Hedges
The Company is exposed to interest rate risk associated
with its fixed rate long-term debt and the Company uses
interest rate swaps to convert certain fixed rate debt to
floating rate at the time of issuance. In conjunction with
its international banking activities, the Company hedges
the fair value changes related to a portion of its callable
term customer deposits. Such transactions are hedged
using callable interest rate swaps. The Company is also
subject to interest rate risk related to its fixed rate
corporate debt securities and, from time to time, the
Company enters into interest rate swaps to hedge this
exposure. For 2005, 2004 and 2003, there were no
gains or losses on derivative transactions or portions
thereof that were excluded from the assessment of hedge
effectiveness. Hedge ineffectiveness for 2005, 2004 and
2003 was immaterial. The total fair value, excluding
accruals, of derivative product assets and liabilities
designated as fair value hedges was $4 million and
$97 million, respectively, as of December 31, 2005 and
$12 million and $88 million, respectively, as of
December 31, 2004.
Hedges of Net Investment in Foreign Operations
The Company designates foreign currency derivatives,
primarily forward agreements, as hedges of net invest-
ments in certain foreign operations. For 2005, the net
amount of total losses related to the hedges included in
foreign currency translation adjustments was $8 mil-
lion, net of tax. The total fair value of these derivative
product assets and liabilities was $20 million and $13
million as of December 31, 2005 and $13 million and
$120 million as of December 31, 2004.
Derivatives Not Designated as Hedges
The Company has economic hedges that either
do not qualify or are not designated for hedge account-
ing treatment.
Foreign currency transactions and non-U.S. dollar
cash flow exposures are economically hedged, where
practical, through foreign currency contracts, primarily
forward contracts, foreign currency options and cross-
currency swaps. 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. The total
fair value, excluding accruals, of these derivative prod-
uct assets and liabilities were both $13 million as of
December 31, 2005 and $44 million and $78 million,
respectively, as of December 31, 2004.
From time to time, the Company will also enter into
interest rate swaps to specifically manage funding costs
related to its credit card business. As of December 31,
2005, the fair value was not significant. As of
December 31, 2004, the total fair value of derivative
product assets and liabilities was $14 million and
$10 million, respectively.
Within its international banking operations, the Com-
pany enters into derivative contracts to meet the
needs of its clients and, to a limited extent, for trading
purposes, including taking proprietary positions.
The international banking derivative activities also
include economic hedging of various foreign currency
and interest rate exposures related to its other banking
activities. The total fair value, excluding accruals,
of these derivative product assets and liabilities was
$267 million and $226 million, respectively, as of
December 31, 2005 and $549 million and $498 million,
respectively, as of December 31, 2004. These amounts
include the identified embedded derivatives dis-
cussed below.
Embedded Derivatives
The Company has identified certain derivatives embed-
ded in other financial instruments that are required to
be accounted for separately from the host financial
instrument. Such items included certain structured cus-
tomer deposit products issued by the international
banking operations which have returns tied to the per-
formance of equity markets or other indexes and finan-
cial instruments. As of December 31, 2005 and 2004,
the total fair value of such derivative product liabilities
was $25 million and $1 million, respectively.
Notes to Consolidated
Financial Statements
AXP / AR.2005
[84 ]