Bank of America 2005 Annual Report Download - page 147

BANK OF AMERICA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Interest rate contracts, which are generally non-leveraged generic interest rate and basis swaps, options and
futures, allow the Corporation to 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 underlying 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 the ALM process 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
currency-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.
Fair Value and Cash Flow Hedges
The Corporation uses various types of interest rate and foreign currency exchange rate derivative contracts to
protect against changes in the fair value of its fixed-rate assets and liabilities due to fluctuations in interest rates and
exchange rates (fair value hedges). The Corporation also uses these types of contracts to protect against changes in the
cash flows of its variable-rate assets and liabilities, and other forecasted transactions (cash flow hedges).
For cash flow hedges, gains and losses on derivative contracts reclassified from Accumulated OCI to current period
earnings are included in the line item in the Consolidated Statement of Income in which the hedged item is recorded and
in the same period the hedged item affects earnings. During the next 12 months, net losses on derivative instruments
included in Accumulated OCI of approximately $632 million (pre-tax) are expected to be reclassified into earnings. These
net losses reclassified into earnings are expected to decrease income or increase expense on the respective hedged items.
The following table summarizes certain information related to the Corporation’s hedging activities for 2005 and
2004:
(Dollars in millions) 2005 2004
Fair value hedges
Hedge ineffectiveness recognized in earnings(1) ............................................ $166 $10
Net loss excluded from assessment of effectiveness(2) ....................................... (13) (6)
Cash flow hedges
Hedge ineffectiveness recognized in earnings(3) ............................................ (31) (11)
Net investment hedges
Gains (losses) included in foreign currency translation adjustments within Accumulated OCI .... 66 (157)
(1) Included $5 million and $(8) million recorded in Net Interest Income, $167 million and $18 million recorded in Mortgage Banking
Income, $(5) million and $0 recorded in Investment Banking Income, and $(1) million and $0 recorded in Trading Account Profits in
the Consolidated Statement of Income for 2005 and 2004.
(2) Included $0 and $(5) million recorded in Net Interest Income and $(15) million and $(1) million recorded in Mortgage Banking
Income, and $2 million and $0 recorded in Investment Banking Income in the Consolidated Statement of Income for 2005 and 2004.
(3) Included $(17) million and $(13) million recorded in Net Interest Income and $(14) million and $2 million recorded in Mortgage
Banking Income from other cash flow hedges in the Consolidated Statement of Income for 2005 and 2004.
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