GE 2010 Annual Report Download - page 115

GE 2010 ANNUAL REPORT 113
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The following table provides information about the fair value
of our derivatives, by contract type, separating those accounted
for as hedges and those that are not.
2010 2009
Fair value Fair value
December 31 (In millions) Assets Liabilities Assets Liabilities
DERIVATIVES ACCOUNTED
FOR AS HEDGES
Interest rate contracts $ 5,959 $ 2,675 $ 4,477 $ 3,469
Currency exchange
contracts 2,965 2,533 4,273 2,361
Other contracts 5 — 16 4
8,929 5,208 8,766 5,834
DERIVATIVES NOT ACCOUNTED
FOR AS HEDGES
Interest rate contracts 294 552 974 892
Currency exchange
contracts 1,602 846 1,639 658
Other contracts 531 50 478 136
2,427 1,448 3,091 1,686
NETTING ADJUSTMENTS (a) (3,867) (3,857) (3,851) (3,860)
Total $ 7,489 $ 2,799 $ 8,006 $ 3,660
Derivatives are classified in the captions “All other assets” and “All other liabilities” in
our financial statements.
(a) The netting of derivative receivables and payables is permitted when a legally
enforceable master netting agreement exists. Amounts included fair value
adjustments related to our own and counterparty non-performance risk. At
December 31, 2010 and 2009, the cumulative adjustment for non-performance
risk was a loss of $10 million and a gain of $9 million, respectively.
FAIR VALUE HEDGES
We use interest rate and currency exchange derivatives to hedge
the fair value effects of interest rate and currency exchange rate
changes on local and non-functional currency denominated
fixed-rate debt. For relationships designated as fair value hedges,
changes in fair value of the derivatives are recorded in earnings
within interest and other financial charges, along with offsetting
adjustments to the carrying amount of the hedged debt. The
following table provides information about the earnings effects
of our fair value hedging relationships for the years ended
December 31, 2010 and 2009.
2010
2009
Gain (loss) Gain (loss) Gain (loss) Gain (loss)
Year ended on hedging on hedged on hedging on hedged
December 31 (In millions) derivatives items derivatives items
Interest rate contracts $2,387 $(2,924) $(5,194) $4,998
Currency exchange
contracts 47 (60) (1,106) 1,093
Fair value hedges resulted in $(550) million and $(209) million of ineffectiveness in
2010 and 2009, respectively. In 2010 and 2009, there were insignificant amounts and
$(225) million excluded from the assessment of effectiveness, respectively.
CASH FLOW HEDGES
We use interest rate, currency exchange and commodity deriva-
tives to reduce the variability of expected future cash flows
associated with variable rate borrowings and commercial pur-
chase and sale transactions, including commodities. For
derivatives that are designated in a cash flow hedging relation-
ship, the effective portion of the change in fair value of the
derivative is reported as a component of AOCI and reclassified
LOAN COMMITMENTS
Notional amount
December 31 (In millions) 2010 2009
Ordinary course of business
lending commitments
(a)(b) $ 4,507 $ 6,676
Unused revolving credit lines
(c)
Commercial
(d) 23,779 31,760
Consumer—principally credit cards 227,006 229,386
(a) Excluded investment commitments of $1,990 million and $2,659 million as of
December 31, 2010 and 2009, respectively.
(b) Included a $972 million commitment as of December 31, 2009, associated with
a secured financing arrangement that could have increased to a maximum of
$4,998 million based on the asset volume under the arrangement. This
commitment was terminated during the third quarter of 2010.
(c) Excluded inventory financing arrangements, which may be withdrawn at our
option, of $11,840 million and $13,889 million as of December 31, 2010 and
2009, respectively.
(d) Included commitments of $16,243 million and $17,643 million as of December 31,
2010 and 2009, respectively, associated with secured financing arrangements that
could have increased to a maximum of $20,268 million and $23,992 million at
December 31, 2010 and 2009, respectively, based on asset volume under the
arrangement.
Derivatives and hedging
As a matter of policy, we use derivatives for risk management
purposes, and we do not use derivatives for speculative purposes.
A key risk management objective for our financial services busi-
nesses is to mitigate interest rate and currency risk by seeking to
ensure that the characteristics of the debt match the assets they
are funding. If the form (fixed versus floating) and currency
denomination of the debt we issue do not match the related
assets, we typically execute derivatives to adjust the nature and
tenor of funding to meet this objective. The determination of
whether we enter into a derivative transaction or issue debt
directly to achieve this objective depends on a number of
factors, including market related factors that affect the type
of debt we can issue.
The notional amounts of derivative contracts represent the
basis upon which interest and other payments are calculated and
are reported gross, except for offsetting foreign currency forward
contracts that are executed in order to manage our currency risk
of net investment in foreign subsidiaries. Of the outstanding
notional amount of $347,000 million, approximately 86% or
$300,000 million, is associated with reducing or eliminating the
interest rate, currency or market risk between financial assets
and liabilities in our financial services businesses. The remaining
derivative activities primarily relate to hedging against adverse
changes in currency exchange rates and commodity prices
related to anticipated sales and purchases and contracts contain-
ing certain clauses which meet the accounting definition of a
derivative. The instruments used in these activities are desig-
nated as hedges when practicable. When we are not able to apply
hedge accounting, or when the derivative and the hedged item
are both recorded in earnings currently, the derivatives are
deemed economic hedges and hedge accounting is not applied.
This most frequently occurs when we hedge a recognized foreign
currency transaction (e.g., a receivable or payable) with a deriva-
tive. Since the effects of changes in exchange rates are reflected
currently in earnings for both the derivative and the transaction,
the economic hedge does not require hedge accounting.