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BANK OF AMERICA 2001 ANNUAL REPORT
69
Interest Rate and Foreign Exchange Contracts
Risk management interest rate contracts and foreign exchange contracts are utilized in the Corporation’s ALM process. The Corporation maintains an
overall interest rate risk management strategy that incorporates the use of interest rate contracts to minimize significant unplanned fluctuations in
earnings that are caused by interest rate volatility. The Corporation’s goal is to manage interest rate sensitivity so that movements in interest rates do
not adversely affect net interest income. As a result of interest rate fluctuations, hedged fixed-rate assets and liabilities appreciate or depreciate in
market value. Gains or losses on the derivative instruments that are linked to the hedged fixed-rate assets and liabilities are expected to substantially
offset this unrealized appreciation or depreciation. Interest income on hedged variable-rate assets, primarily variable rate commercial loans, and interest
expense on hedged variable rate liabilities, primarily short-term time deposits, increases or decreases as a result of interest rate fluctuations. Gains
and losses on the derivative instruments that are linked to these hedged assets and liabilities are expected to substantially offset this variability in
earnings. See Note Five of the consolidated financial statements for additional information on the Corporation’s hedging activities.
Interest rate contracts, which are generally non-leveraged generic interest rate and basis swaps, options, futures and forwards, allow the Corporation
to effectively manage its interest rate risk position. In addition, the Corporation uses foreign currency contracts to manage the foreign exchange risk
associated with foreign-denominated assets and liabilities, as well as the Corporation’s equity investments in foreign subsidiaries. Table Twenty-Four
reflects the notional amounts, fair value, weighted average receive and pay rates, expected maturity and estimated duration of the Corporation’s ALM
derivatives at December 31, 2001 and 2000. Fair values are based on the last repricing and will change in the future primarily based on movements in
one-, three- and six-month LIBOR rates. Management believes the fair value of the ALM interest rate and foreign exchange portfolios should be viewed
in the context of the overall balance sheet, and the value of any single component of the balance sheet positions should not be viewed in isolation.
Consistent with the Corporation’s strategy of managing interest rate sensitivity, the net receive fixed interest rate swap position declined by
$5.8 billion to $43.0 billion at December 31, 2001. This reduction primarily occurred in the last half of 2001. Option products in the Corporation’s ALM
process may include from time to time option collars or spread strategies, which involve the buying and selling of options on the same underlying
security or interest rate index. These strategies may involve caps, floors and options on index futures contracts.
The amount of unamortized net realized deferred gains associated with closed ALM swaps was $966 million and $25 million at December 31, 2001
and 2000, respectively. The amount of unamortized net realized deferred gains associated with closed ALM options was $114 million and $95 million
at December 31, 2001 and 2000, respectively. The amount of unamortized net realized deferred losses associated with closed ALM futures and forward
contracts was $9 million and $15 million at December 31, 2001 and 2000, respectively. There were no unamortized net realized deferred gains or losses
associated with closed foreign exchange contracts at December 31, 2001 and 2000. Of these unamortized net realized deferred gains, $1.0 billion was
included in accumulated other comprehensive income at December 31, 2001.
Table 24 Asset and Liability Management Interest Rate and Foreign Exchange Contracts
December 31, 2001
Expected Maturity Average
(Dollars in millions, average
Fair After Estimated
estimated duration in years)
Value Total 2002 2003 2004 2005 2006 2006 Duration
Open interest rate contracts
Total receive fixed swaps $784 4.68
Notional value $ 64,472 $ 1,510 $ 266 $10,746 $ 8,341 $9,608 $ 34,001
Weighted average receive rate 5.74% 7.04% 8.27% 5.31% 5.79% 5.37% 5.89%
Total pay fixed swaps (322) 2.26
Notional value $ 21,445 $11,422 $4,319 $ 122 $2,664 $ 60 $ 2,858
Weighted average pay rate 3.97% 2.61% 4.21% 6.09% 6.77% 5.83% 6.34%
Basis swaps –
Notional value $ 15,700 $ – $ – $ 9,000 $ 500 $4,400 $ 1,800
Total swaps 462
Option products 105
Notional amount $ 7,000 $ – $7,000
Futures and forward rate contracts –
Notional amount $–
Total open interest rate contracts 567
Closed interest rate contracts(1) 1,071
Net interest rate contract position 1,638
Open foreign exchange contracts (285)
Notional amount $ 6,968 $ 465 $ 283 $ 576 $ 1,180 $ 2,335 $ 2,129
Total ALM contracts $1,353