American Express 2015 Annual Report Download - page 148

NET INVESTMENT HEDGES
A net investment hedge is used to hedge future changes in currency exposure of a net investment in a foreign
operation. The Company primarily designates foreign currency derivatives, typically foreign exchange forwards, and
on occasion foreign currency denominated debt, as hedges of net investments in certain foreign operations. These
instruments reduce exposure to changes in currency exchange rates on the Company’s investments in non-U.S.
subsidiaries. The effective portion of the gain on net investment hedges, net of taxes, recorded in Accumulated Other
Comprehensive Income (Loss) as part of the cumulative translation adjustment, was $577 million, $455 million and
$253 million for the years ended 2015, 2014 and 2013, respectively, with any ineffective portion recognized in Other
expenses during the period of change.
Gains (losses) recognized in income
Amount reclassified from AOCI into income Net hedge ineffectiveness
Description (Millions) Income Statement Line Item 2015 2014 2013 Income Statement Line Item 2015 2014 2013
Net investment hedges:
Foreign exchange contracts . . . Other expenses $— $10 $— Other expenses $1 $— $—
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 designated currencies 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 also may enter into interest rate swaps to specifically manage
funding costs related to its proprietary card business.
The Company also 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 embedded derivative is accounted for separately and is classified as a 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 the Consolidated Statements of Income associated with the
Company’s derivatives not designated as hedges for the years ended December 31:
Pretax gains (losses)
Amount
Description (Millions) Income Statement Line Item 2015 2014 2013
Interest rate contracts ...................... Other expenses $— $— $1
Foreign exchange contracts (a) ................ Other expenses (39) 194 72
Cost of Card Member services 54—
Total ..................................... $(34) $198 $73
(a) Foreign exchange contracts include forwards and embedded foreign currency derivatives.
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