American Express 2014 Annual Report Download - page 103

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AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DERIVATIVES NOT DESIGNATED AS HEDGES
The Company has derivatives that act as economic hedges, but are not designated as such for hedge accounting purposes. Foreign currency
transactions and non-U.S. dollar cash flow exposures from time to time may be partially or fully economically hedged through foreign
currency contracts, primarily foreign exchange forwards, options and cross-currency swaps. These hedges generally mature within one year.
Foreign currency contracts involve the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified date.
The changes in the fair value of the derivatives effectively offset the related foreign exchange gains or losses on the underlying balance sheet
exposures. From time to time, the Company may enter into interest rate swaps to specifically manage funding costs related to its proprietary
card business.
The Company has certain operating agreements containing payments that may be linked to a market rate or price, primarily foreign
currency rates. The payment components of these agreements may meet the definition of an embedded derivative, in which case the
embeddedderivativeisaccountedforseparatelyandisclassifiedasa foreign exchange contract based on its primary risk exposure.
For derivatives that are not designated as hedges, changes in fair value are reported in current period earnings.
The following table summarizes the impact on pretax earnings of derivatives not designated as hedges, as reported on the Consolidated
Statements of Income for the years ended December 31:
Pretax gains (losses)
Amount
Description (Millions) Income Statement Line Item 2014 2013 2012
Interest rate contracts Other expenses $—$1$(1)
Foreign exchange contracts(a) Interest expense on long-term debt and other ——(1)
Other expenses 194 72 (56)
Cost of Card Member services 4——
Total $198$73$(58)
(a) Foreign exchange contracts include forwards and embedded foreign currency derivatives. Gains (losses) on these embedded derivatives are included in Other
expenses.
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