AT&T Wireless 2010 Annual Report Download - page 79

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AT&T Inc. 77
Following is the fair value leveling for available-for-sale securities and derivatives as of December 31, 2010, and December 31, 2009.
December 31, 2010
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 976 — $ — $ 976
International equities 513 — — 513
Fixed income bonds — 639 — 639
Asset Derivatives
Interest rate swaps — 537 — 537
Cross-currency swaps — 327 — 327
Interest rate locks — 11 — 11
Foreign exchange contracts — 6 — 6
Liability Derivatives
Cross-currency swaps — (675) — (675)
Interest rate locks — (187) — (187)
Foreign exchange contracts — (2) — (2)
December 31, 2009
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $1,047 $ — $ — $1,047
International equities 412 — — 412
Fixed income bonds — 341 — 341
Asset Derivatives
Interest rate swaps — 399 — 399
Cross-currency swaps — 635 — 635
Interest rate locks — 150 — 150
Foreign exchange contracts — 2 — 2
Liability Derivatives
Cross-currency swaps — (390) — (390)
Interest rate locks — (6) — (6)
Foreign exchange contracts — (7) — (7)
Fair Value Hedging We designate our fixed-to-floating
interest rate swaps as fair value hedges. The purpose of these
swaps is to manage interest rate risk by managing our mix
of fixed-rate and floating-rate debt. These swaps involve
the receipt of fixed-rate amounts for floating interest rate
payments over the life of the swaps without exchange of the
underlying principal amount. Accrued and realized gains or
losses from interest rate swaps impact interest expense on
the consolidated statements of income. Unrealized gains on
interest rate swaps are recorded at fair market value as assets,
and unrealized losses on interest rate swaps are recorded at
fair market value as liabilities. Changes in the fair value of
the interest rate swaps offset changes in the fair value of
the fixed-rate notes payable they hedge due to changes in
the designated benchmark interest rate and are recognized
in interest expense, though they net to zero. Gains or losses
realized upon early termination of our fair value hedges
would be recognized in interest expense.
Derivative Financial Instruments
We employ derivatives to manage certain market risks,
primarily interest rate risk and foreign currency exchange risk.
This includes the use of interest rate swaps, interest rate locks,
foreign exchange forward contracts and combined interest rate
foreign exchange contracts (cross-currency swaps). We do not
use derivatives for trading or speculative purposes. We record
derivatives on our consolidated balance sheets at fair value,
which is derived from observable market data, including yield
curves and foreign exchange rates (all of our derivatives are
Level 2). Cash flows associated with derivative instruments
are presented in the same category on the consolidated
statements of cash flows as the item being hedged.
The majority of our derivatives are designated either as a
hedge of the fair value of a recognized asset or liability or
of an unrecognized firm commitment (fair value hedge), or
as a hedge of a forecasted transaction or of the variability
of cash flows to be received or paid related to a recognized
asset or liability (cash flow hedge).