Wells Fargo 2012 Annual Report Download - page 195

Note 16: Derivatives
We primarily use derivatives to manage exposure to market risk,
interest rate risk, credit risk and foreign currency risk, and to
assist customers with their risk management objectives. We
designate derivatives either as hedging instruments in a
qualifying hedge accounting relationship (fair value or cash flow
hedge) or as free-standing derivatives. Free-standing derivatives
include economic hedges that do not qualify for hedge
accounting and derivatives held for customer accommodation or
other trading purposes.
Our asset/liability management approach to interest rate,
foreign currency and certain other risks includes the use of
derivatives. Such derivatives are typically designated as fair
value or cash flow hedges, or free-standing derivatives
(economic hedges) for those that do not qualify for hedge
accounting. This helps minimize significant, unplanned
fluctuations in earnings, fair values of assets and liabilities, and
cash flows caused by interest rate, foreign currency and other
market value volatility. This approach involves modifying the
repricing characteristics of certain assets and liabilities so that
changes in interest rates, foreign currency and other exposures
do not have a significantly adverse effect on the net interest
margin, cash flows and earnings. As a result of fluctuations in
these exposures, hedged assets and liabilities will gain or lose
market value. In a fair value or economic hedge, the effect of this
unrealized gain or loss will generally be offset by the gain or loss
on the derivatives linked to the hedged assets and liabilities. In a
cash flow hedge, where we manage the variability of cash
payments due to interest rate fluctuations by the effective use of
derivatives linked to hedged assets and liabilities, the unrealized
gain or loss on the derivatives or the hedged asset or liability is
generally reflected in other comprehensive income and not in
earnings.
We also offer various derivatives, including interest rate,
commodity, equity, credit and foreign exchange contracts, to our
customers as part of our trading businesses but usually offset our
exposure from such contracts by entering into other financial
contracts. These derivative transactions are conducted in an
effort to help customers manage their market price risks. The
customer accommodations and any offsetting derivative
contracts are treated as free-standing derivatives. To a much
lesser extent, we take positions executed for our own account
based on market expectations or to benefit from price
differentials between financial instruments and markets.
Additionally, free-standing derivatives include embedded
derivatives that are required to be accounted for separately from
their host contracts.
The following table presents the total notional or contractual
amounts and fair values for our derivatives. Derivative
transactions can be measured in terms of the notional amount,
but this amount is not recorded on the balance sheet and is not,
when viewed in isolation, a meaningful measure of the risk
profile of the instruments. The notional amount is generally not
exchanged, but is used only as the basis on which interest and
other payments are determined. Derivatives designated as
qualifying hedge contracts and free-standing derivatives
(economic hedges) are recorded on the balance sheet at fair
value in other assets or other liabilities. Customer
accommodation, trading and other free-standing derivatives are
recorded on the balance sheet at fair value in trading assets,
other assets or other liabilities.
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