GE 2005 Annual Report Download - page 131

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(131)
For hedge relationships discontinued because the forecasted transaction is not expected to occur by the end of the
originally specified period, any related derivative amounts recorded in equity are reclassified to earnings.
In 2005, we recognized an insignificant loss related to hedged forecasted transactions and firm
commitments that did not occur by the end of the originally specified period.
In 2004, we recognized a pre-tax loss of $46 million, before cancelation penalties, for terminating a
forward euro contract when our customer canceled its hedged, firm order for equipment and services.
Additional information regarding the use of derivatives related to our financing activities is provided in
note 18.
Counterparty credit risk
The risk that counterparties to derivative contracts will default and not make payments to us according to the terms
of the agreements is counterparty credit risk. We manage counterparty credit risk on an individual counterparty
basis, which means that we net exposures on transactions by counterparty where legal right of offset exists and
include the value of collateral to determine the amount of exposure to each counterparty. When the net exposure to a
counterparty, based on the current market value of transactions, exceeds credit exposure limits (see table below),
actions are taken to reduce exposure. Actions can include prohibiting the counterparty from entering into additional
transactions, requiring collateral from the counterparty (as described below) and terminating or restructuring
transactions.
Swaps are required to be executed under master agreements containing mutual credit downgrade provisions
that provide the ability to require assignment or termination in the event either party is downgraded below A3 or A-.
To mitigate credit risk, in certain cases we have entered into collateral arrangements that provide us with the right to
hold collateral when the current market value of derivative contracts exceeds an exposure threshold. Under these
arrangements, we may receive rights to cash or U.S. Treasury or other highly-rated securities to secure our exposure.
Such collateral is available to us in the event that a counterparty defaults. We evaluate credit risk exposures and
compliance with credit exposure limits net of such collateral.
Fair values of our derivatives assets and liabilities represent the replacement value of existing derivatives at
market prices and can change significantly from period to period based on, among other factors, market movements
and changes in our positions. At December 31, 2005, our exposure to counterparties, after consideration of netting
arrangements and collateral, was $779 million.
Following is GECS policy relating to initial credit rating requirements and to exposure limits to
counterparties.