Bank of America 2004 Annual Report Download - page 112

Download and view the complete annual report

Please find page 112 of the 2004 Bank of America 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 154

  • 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
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154

BANK OF AMERICA 2004 111
Note 3
Trading Account Assets and Liabilities
The Corporation engages in a variety of trading-related activities that
are either for clients or its own account.
The following table presents the fair values of the components
of Trading Account Assets and Liabilities at December 31, 2004
and 2003.
December 31 FleetBoston
(Dollars in millions) 2004 2003 April 1, 2004
■■■■■■■■■
Trading account assets
U.S. government and
agency securities $ 20,462 $ 16,073 $ 561
Corporate securities,
trading loans and other 35,227 25,647 353
Equity securities 19,504 11,445 2
Mortgage trading loans and
asset-backed securities 9,625 8,221 2,199
Foreign sovereign debt 8,769 7,161 94
■■■■■■■■■
Total $ 93,587 $ 68,547 $ 3,209
■■■■■■■■■
Trading account liabilities
U.S. government and
agency securities $ 14,332 $ 7,304 $ 64
Equity securities 8,952 8,863 –
Corporate securities,
trading loans and other 8,538 5,379 356
Foreign sovereign debt 4,793 5,276 –
Mortgage trading loans and
asset-backed securities 39 22 355
■■■■■■■■■
Total $ 36,654 $ 26,844 $ 775
■■■■■■■■■
Note 4
Derivatives
The Corporation designates a derivative as held for trading or hedg-
ing purposes when it enters into the derivative contract. The desig-
nation may change based upon management’s reassessment or
changing circumstances. Derivatives utilized by the Corporation
include swaps, financial futures and forward settlement contracts,
and option contracts. A swap agreement is a contract between two
parties to exchange cash flows based on specified underlying
notional amounts, assets and/or indices. Financial futures and for-
ward settlement contracts are agreements to buy or sell a quantity of
a financial instrument, index, currency or commodity at a predeter-
mined future date, and rate or price. An option contract is an agree-
ment that conveys to the purchaser the right, but not the obligation,
to buy or sell a quantity of a financial instrument (including another
derivative financial instrument), index, currency or commodity at a
predetermined rate or price during a period or at a time in the future.
Option agreements can be transacted on organized exchanges or
directly between parties. The Corporation also provides credit deriva-
tives to customers who wish to increase or decrease credit expo-
sures. In addition, the Corporation utilizes credit derivatives to
manage the credit risk associated with the loan portfolio.
Credit Risk Associated with Derivative Activities
Credit risk associated with derivatives is measured as the net
replacement cost in the event the counterparties with contracts in a
gain position to the Corporation completely fail to perform under the
terms of those contracts. In managing derivative credit risk, both the
current exposure, which is the replacement cost of contracts on the
measurement date, as well as an estimate of the potential change
in value of contracts over their remaining lives are considered. The
Corporation’s derivative activities are primarily with financial institu-
tions and corporations. To minimize credit risk, the Corporation
enters into legally enforceable master netting agreements, which
reduce risk by permitting the closeout and netting of transactions
with the same counterparty upon occurrence of certain events. In
addition, the Corporation reduces credit risk by obtaining collateral
from counterparties. The determination of the need for and the lev-
els of collateral will vary based on an assessment of the credit risk
of the counterparty. Generally, the Corporation accepts collateral in
the form of cash, U.S. Treasury securities and other marketable
securities. The Corporation held $26.9 billion of collateral on deriv-
ative positions, of which $16.8 billion could be applied against
credit risk at December 31, 2004.
A portion of the derivative activity involves exchange-traded
instruments. Exchange-traded instruments conform to standard terms
and are subject to policies set by the exchange involved, including
margin and security deposit requirements. Management believes the
credit risk associated with these types of instruments is minimal.