Bank of America 2013 Annual Report Download - page 170

168 Bank of America 2013
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 (CDS), total return
swaps and swaptions. These derivatives are recorded on the
Consolidated Balance Sheet at fair value with changes in fair value
recorded in other income (loss).
Derivatives Designated as Accounting Hedges
The Corporation uses various types of interest rate, commodity
and foreign exchange derivative contracts to protect against
changes in the fair value of its assets and liabilities due to
fluctuations in interest rates, commodity prices and exchange
rates (fair value hedges). The Corporation also uses these types
of contracts and equity derivatives to protect against changes in
the cash flows of its assets and liabilities, and other forecasted
transactions (cash flow hedges). The Corporation hedges its net
investment in consolidated non-U.S. operations determined to
have functional currencies other than the U.S. dollar using forward
exchange contracts and cross-currency basis swaps, and by
issuing foreign currency-denominated debt (net investment
hedges).
Fair Value Hedges
The table below summarizes certain information related to fair
value hedges for 2013, 2012 and 2011, including hedges of
interest rate risk on long-term debt that were acquired as part of
a business combination and redesignated. At redesignation, the
fair value of the derivatives was positive. As the derivatives mature,
the fair value will approach zero. As a result, ineffectiveness will
occur and the fair value changes in the derivatives and the long-
term debt being hedged may be directionally the same in certain
scenarios. Based on a regression analysis, the derivatives
continue to be highly effective at offsetting changes in the fair
value of the long-term debt attributable to interest rate risk.
Derivatives Designated as Fair Value Hedges
Gains (Losses) 2013
(Dollars in millions) Derivative
Hedged
Item
Hedge
Ineffectiveness
Interest rate risk on long-term debt (1) $(4,704) $ 3,925 $ (779)
Interest rate and foreign currency risk on long-term debt (1) (1,291) 1,085 (206)
Interest rate risk on available-for-sale securities (2) 839 (840)(1)
Price risk on commodity inventory (3) (13) 11 (2)
Total $(5,169) $ 4,181 $ (988)
2012
Interest rate risk on long-term debt (1) $ (195) $ (770) $ (965)
Interest rate and foreign currency risk on long-term debt (1) (1,482) 1,225 (257)
Interest rate risk on available-for-sale securities (2) (4) 91 87
Price risk on commodity inventory (3) (6) 6 —
Total $ (1,687) $ 552 $ (1,135)
2011
Interest rate risk on long-term debt (1) $ 4,384 $ (4,969) $ (585)
Interest rate and foreign currency risk on long-term debt (1) 780 (1,057) (277)
Interest rate risk on available-for-sale securities (2) (11,386) 10,490 (896)
Price risk on commodity inventory (3) 16 (16) —
Total $ (6,206) $ 4,448 $ (1,758)
(1) Amounts are recorded in interest expense on long-term debt and in other income (loss).
(2) Amounts are recorded in interest income on debt securities. Hedged AFS securities positions were sold during 2013 and the related hedges were terminated.
(3) Amounts relating to commodity inventory are recorded in trading account profits.