American Express 2010 Annual Report Download - page 30

Download and view the complete annual report

Please find page 30 of the 2010 American Express annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 127

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127

FAIR VALUE MEASUREMENT (CONTINUED)
Description Assumptions/Approach Used
Effect if Actual Results Differ
from Assumptions
Derivative Instruments
The Company’s primary derivative
instruments include interest rate swaps,
foreign currency forward agreements and
cross-currency swaps. Derivative
instruments are reported at fair value in
other assets and other liabilities on the
Company’s Consolidated Balance Sheets.
Changes in fair value are recorded in
accumulated other comprehensive (loss)
income, and/or in the Consolidated
Statements of Income, depending on
(i) the documentation and designation of
the derivative instrument, and (ii) if the
derivative instrument is in a hedging
relationship, its effectiveness in offsetting
the changes in the designated risk being
hedged.
Derivative Instruments
The fair value of the Company’s derivative
instruments is estimated by using either a
third-party valuation service that uses
proprietary pricing models, or by internal
pricing models. The pricing models do not
contain a high level of subjectivity as the
valuation techniques used do not require
significant judgment and inputs to those
models are readily observable from actively
quoted markets. The pricing models used
are consistently applied and reflect the
contractual terms of the derivatives,
including the period of maturity, and
market-based parameters such as interest
rates, foreign exchange rates, equity indices
or prices, and volatility.
Credit valuation adjustments are
necessary when the market parameters,
such as a benchmark curve, used to value
the derivative instruments are not
indicative of the credit quality of the
Company or its counterparties. The
Company considers the counterparty credit
risk by applying an observable forecasted
default rate to the current exposure.
The Company manages derivative
instrument counterparty credit risk by
considering the current exposure, which is
the replacement cost of contracts on the
measurement date, as well as estimating
the maximum potential value of the
contracts over the next 12 months,
considering such factors as the volatility of
the underlying or reference index. To
mitigate derivative instrument credit risk,
counterparties are required to be pre-
approved and rated as investment grade.
The Company’s derivative instruments
are classified in Level 2 of the fair value
hierarchy. Refer to Notes 3 and 12 to the
Company’s Consolidated Financial
Statements.
Derivative Instruments
In the measurement of fair value for the
Company’s derivative instruments,
although the underlying inputs used in the
pricing models are readily observable from
actively quoted markets, the pricing models
do entail a certain amount of subjectivity
and therefore, differing judgments in how
the underlying inputs are modeled could
result in different estimates of fair value.
In addition, any necessary credit valuation
adjustments are based on observable
default rates. A change in facts and
circumstances could lead to a change in
management judgment about counterparty
credit quality, which could result in the
Company recognizing an additional
counterparty credit valuation adjustment.
As of December 31, 2010, the credit and
nonperformance risks associated with the
Company’s derivative instrument
counterparties were not significant.
28
AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW