Bank of America 2010 Annual Report Download - page 160

(Dollars in billions)
Contract/
Notional
(1)
Trading
Derivatives
and
Economic
Hedges
Qualifying
Accounting
Hedges
(2)
Total
Trading
Derivatives
and
Economic
Hedges
Qualifying
Accounting
Hedges
(2)
Total
Gross Derivative Assets Gross Derivative Liabilities
December 31, 2009
Interest rate contracts
Swaps $45,261.5 $1,121.3 $ 5.6 $ 1,126.9 $1,105.0 $0.8 $ 1,105.8
Futures and forwards 11,842.1 7.1 – 7.1 6.1 – 6.1
Written options 2,865.5 – – – 84.1 – 84.1
Purchased options 2,626.7 84.1 – 84.1 – – –
Foreign exchange contracts
Swaps 661.9 23.7 4.6 28.3 27.3 0.5 27.8
Spot, futures and forwards 1,750.8 24.6 0.3 24.9 25.6 0.1 25.7
Written options 383.6 – – – 13.0 – 13.0
Purchased options 355.3 12.7 – 12.7 – – –
Equity contracts
Swaps 58.5 2.0 – 2.0 2.0 – 2.0
Futures and forwards 79.0 3.0 – 3.0 2.2 – 2.2
Written options 283.4 – – – 25.1 0.4 25.5
Purchased options 273.7 27.3 – 27.3 – – –
Commodity contracts
Swaps 65.3 6.9 0.1 7.0 6.8 – 6.8
Futures and forwards 387.8 10.4 – 10.4 9.6 – 9.6
Written options 54.9 – – – 7.9 – 7.9
Purchased options 50.9 7.6 – 7.6 – – –
Credit derivatives
Purchased credit derivatives:
Credit default swaps 2,800.5 105.5 – 105.5 45.2 – 45.2
Total return swaps/other 21.7 1.5 – 1.5 0.4 – 0.4
Written credit derivatives:
Credit default swaps 2,788.8 44.1 – 44.1 98.4 – 98.4
Total return swaps/other 33.1 1.8 – 1.8 1.1 – 1.1
Gross derivative assets/liabilities $1,483.6 $10.6 $ 1,494.2 $1,459.8 $1.8 $ 1,461.6
Less: Legally enforceable master netting agreements (1,355.1) (1,355.1)
Less: Cash collateral applied (51.5) (55.8)
Total derivative assets/liabilities $ 87.6 $ 50.7
(1)
Represents the total contract/notional amount of derivative assets and liabilities outstanding.
(2)
Excludes $4.4 billion of long-term debt designated as a hedge of foreign currency risk.
ALM and Risk Management Derivatives
The Corporation’s ALM and risk management activities include the use of
derivatives to mitigate risk to the Corporation including both derivatives that
are designated as hedging instruments and economic hedges. Interest rate,
commodity, credit and foreign exchange contracts are utilized in the Corpo-
ration’s ALM and risk management activities.
The Corporation maintains an overall interest rate risk management
strategy that incorporates the use of interest rate contracts, which are
generally non-leveraged generic interest rate and basis swaps, options,
futures, and forwards, 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 signifi-
cantly adversely affect earnings. As a result of interest rate fluctuations,
hedged fixed-rate assets and liabilities appreciate or depreciate in fair 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 rate and market risk can be substantial in the mortgage business.
Market risk is the risk that values of mortgage assets or revenues will be
adversely affected by changes in market conditions such as interest rate
movements. To hedge interest rate risk in mortgage banking production
income, the Corporation utilizes forward loan sale commitments and other
derivative instruments including purchased options. The Corporation also
utilizes derivatives such as interest rate options, interest rate swaps, forward
settlement contracts and euro-dollar futures as economic hedges of the fair
value of MSRs. For additional information on MSRs, see Note 25 – Mortgage
Servicing Rights.
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 investments in non-U.S. subsid-
iaries. 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 de-
crease over their respective lives as currency exchange and interest rates
fluctuate.
The Corporation enters into derivative commodity contracts such as
futures, swaps, options and forwards as well as non-derivative commodity
contracts to provide price risk management services to customers or to
manage price risk associated with its physical and financial commodity
positions. The non-derivative commodity contracts and physical inventories
of commodities expose the Corporation to earnings volatility. Cash flow and
fair value accounting hedges provide a method to mitigate a portion of this
earnings volatility.
The Corporation purchases credit derivatives to manage credit risk related
to certain funded and unfunded credit exposures. Credit derivatives include
credit default swaps, total return swaps and swaptions. These derivatives are
158 Bank of America 2010