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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
NOTE 12 DERIVATIVES AND HEDGING ACTIVITIES
The Company uses derivative financial instruments to manage
exposure to various market risks, such as changes in benchmark
interest rates and foreign exchange rates. These instruments
enable end users to increase, reduce, or alter exposure to
various market risks and, for that reason, are an integral
component of the Company’s market risk and related asset/
liability management strategy and processes. The value of these
derivative instruments is derived from an underlying variable
or multiple variables, including interest rate, foreign exchange,
and equity indices or prices. Overall market risk exposures
are monitored and managed by the Market Risk Committee,
guided by Board-approved policies covering derivative financial
instruments, funding, and investments.
For the Company’s charge card and fixed-rate lending
products, interest rate exposure is managed by using fixed-rate
debt and derivative instruments, primarily interest rate swaps,
to achieve a targeted mix of fixed and floating rate funding.
The Company’s strategy is to lengthen the maturity of interest
rate hedges in periods of low interest rates and to shorten their
maturity in periods of high interest rates. For the majority of its
cardmember loans, which are linked to a floating rate base and
generally reprice each month, the Company uses floating rate
funding. The Company regularly reviews its strategy and may
modify it based on market conditions.
Credit risk associated with the Company’s derivatives
is limited to the risk that a derivative counterparty will not
perform in accordance with the terms of the contract. To
mitigate the risk, counterparties are required to be pre-approved
and rated as investment grade. Counterparty risk exposures are
monitored by the Company’s Institutional Risk Management
Committee (IRMC). The IRMC formally reviews large
institutional exposures to ensure compliance with Enterprise-
wide Risk Management Committee guidelines and procedures
and determines the risk mitigation actions, when necessary.
Additionally, the Company may, from time to time, enter into
master netting agreements where practical.
The following table summarizes the total fair value, excluding interest accruals, of derivative product assets and liabilities at
December 31:
(Millions) 2007 2006
Assets Liabilities Assets Liabilities
Cash flow hedges $ 11 $122 $64 $21
Fair value hedges 114 — — 13
Net investment hedges 62 2 5 14
Derivatives not designated as hedges 61 46 25 13
Total fair value, excluding interest accruals $ 248 $170 $94 $61
The following table summarizes the income effects of derivatives for the years ended December 31:
(Millions) 2007 2006 2005
Cash flow hedges, net of tax(a):
Ineffective net (losses) gains $ (1) $ (1) $ 2
Gains (losses) on forecasted transactions no longer probable to occur $— $ 4 $ (1)
Reclassification of realized gains (losses) from other comprehensive (loss) income $30 $ 158 $44
Fair value hedges, net of tax(a):
Ineffective net gains $— $ (1) $—
Net investment hedges, net of tax:
Reclassification of loss from cumulative translation adjustment as a result of sales of foreign entities $ (3) $(110)(b) $—
(a) There were no (losses) gains due to exclusion of any component of derivative instruments from the assessment of hedge effectiveness for 2007, 2006, and 2005.
(b) Represents the sale of Brazil and certain other dispositions.
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