Bank of America 2002 Annual Report Download - page 89

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BANK OF AMERICA 2002 87
The following table presents the contract/notional and credit
risk amounts at December 31, 2002 and 2001 of the Corporation’s
derivative positions held for trading and hedging purposes. These
derivative positions are primarily executed in the over-the-counter
market. The credit risk amounts presented in the following table do
not consider the value of any collateral held but take into considera-
tion the effects of legally enforceable master netting agreements.
Derivatives(1)
December 31, 2002 December 31, 2001
Contract/ Credit Contract/ Credit
(Dollars in millions)
Notional Risk Notional Risk
Interest rate contracts
Swaps $ 6,781,629 $ 18,981 $ 5,267,608 $ 9,550
Futures and forwards 2,510,259 283 1,663,109 67
Written options 973,113 – 678,242 –
Purchased options 907,999 3,318 704,159 2,165
Foreign exchange contracts
Swaps 175,680 2,460 140,778 2,274
Spot, futures and forwards 724,039 2,535 654,026 2,496
Written options 81,263 – 57,963 –
Purchased options 80,395 452 55,050 496
Equity contracts
Swaps 16,830 679 14,504 562
Futures and forwards 48,470 – 46,970 44
Written options 19,794 – 21,009 –
Purchased options 23,756 2,885 28,902 2,511
Commodity contracts
Swaps 11,776 1,117 6,600 1,152
Futures and forwards 3,478 – 2,176 –
Written options 12,158 – 8,231 –
Purchased options 19,115 347 8,219 199
Credit derivatives 92,098 1,253 57,182 631
Total derivative assets $ 34,310 $ 22,147
(1) Includes both long and short derivative positions.
The average fair value of derivative assets for 2002 and 2001 was
$25.3 billion and $19.8 billion, respectively. The average fair value of
derivative liabilities for 2002 and 2001 was $17.3 billion and $17.4 bil-
lion, respectively.
Asset and Liability Management (ALM) Activities
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 man-
age interest rate sensitivity so that movements in interest rates do not
significantly 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 and interest expense on hedged variable-rate assets
and liabilities, respectively, increases or decreases as a result of inter-
est 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.
Interest rate contracts, which are generally non-leveraged generic
interest rate and basis swaps, options and futures, allow the
Corporation to effectively manage its interest rate risk position. Non-
leveraged generic interest rate swaps involve the exchange of fixed-rate
and variable-rate interest payments based on the contractual under-
lying notional amount. Basis swaps involve the exchange of interest
payments based on the contractual underlying notional amounts,
where both the pay rate and the receive rate are floating rates based on
different indices. Option products primarily consist of caps, floors,
swaptions and options on index futures contracts. Futures contracts
used for ALM activities are primarily index futures providing for cash
payments based upon the movements of an underlying rate index.
The Corporation uses foreign currency contracts to manage the
foreign exchange risk associated with certain foreign-denominated
assets and liabilities, as well as the Corporation’s equity investments in
foreign subsidiaries. Foreign exchange contracts, which include spot,
futures and forward contracts, represent agreements to exchange the
currency of one country for the currency of another country at an
agreed-upon price on an agreed-upon settlement date. Foreign
exchange option contracts are similar to interest rate option contracts
except that they are based on currencies rather than interest rates.
Exposure to loss on these contracts will increase or decrease over their
respective lives as currency exchange and interest rates fluctuate.