Bank of America 2006 Annual Report Download - page 116

The following table presents the contract/notional amounts and
credit risk amounts at December 31, 2006 and 2005 of all the Corpo-
ration’s derivative positions. These derivative positions are primarily exe-
cuted in the over-the-counter market. The credit risk amounts take into
consideration the effects of legally enforceable master netting agree-
ments, and on an aggregate basis have been reduced by the cash
collateral applied against Derivative Assets. At December 31, 2006 and
2005, the cash collateral applied against Derivative Assets on the Con-
solidated Balance Sheet was $7.3 billion and $9.3 billion. In addition, at
December 31, 2006 and 2005, the cash collateral placed against
Derivative Liabilities was $6.5 billion and $7.6 billion.
December 31, 2006 December 31, 2005
(Dollars in millions)
Contract/
Notional
Credit
Risk
Contract/
Notional
Credit
Risk
Interest rate contracts
Swaps
$18,185,655 $ 9,601 $14,401,577 $11,085
Futures and forwards 2,283,579 103 2,113,717 –
Written options 1,043,933 – 900,036 –
Purchased options 1,308,888 2,212 869,471 3,345
Foreign exchange contracts
Swaps 451,462 4,241 333,487 3,735
Spot, futures and forwards 1,234,009 2,995 944,321 2,481
Written options 464,420 – 214,668 –
Purchased options 414,004 1,391 229,049 1,214
Equity contracts
Swaps 32,247 577 28,287 548
Futures and forwards 19,947 24 6,479 44
Written options 102,902 – 69,048 –
Purchased options 104,958 7,513 57,693 6,729
Commodity contracts
Swaps 4,868 1,129 8,809 2,475
Futures and forwards 13,513 2 5,533 –
Written options 9,947 – 7,854 –
Purchased options 6,796 184 3,673 546
Credit derivatives (1) 1,497,869 756 722,190 766
Credit risk before cash collateral 30,728 32,968
Less: Cash collateral applied 7,289 9,256
Total derivative assets $23,439 $23,712
(1) The December 31, 2005 notional amount has been reclassified to conform with new regulatory guidance, which defined the notional as the contractual loss protection for structured basket transactions.
ALM Activities
Interest rate contracts and foreign exchange contracts are utilized in the
Corporation’s ALM activities. The Corporation maintains an overall interest
rate risk management strategy that incorporates the use of interest rate
contracts to minimize significant 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 significantly
adversely affect Net Interest Income. As a result of interest rate fluctua-
tions, 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 increase or
decrease 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.
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 and swaptions. Futures contracts used for the
Corporation’s 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 for-
eign 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 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. Exposure to loss on these contracts will
increase or decrease over their respective lives as currency exchange and
interest rates fluctuate.
114 Bank of America 2006