Capital One 2003 Annual Report Download - page 111

Securitization Cash Flows
Year Ended December 31 2003 2002
Proceeds from new securitizations $11,466,122 $12,533,886
Collections reinvested in revolving-period securitizations 59,279,548 45,740,377
Repurchases of accounts from the trust — —
Servicing fees received 693,166 490,935
Cash flows received on retained interests(1) 3,196,036 3,033,951
(1) Includes all cash receipts of excess spread and other payments (excluding servicing fees) from the Trust to the Company.
For the years ended December 31, 2003 and 2002, the Company recognized $26.6 million in losses and $30.1
million in gains, respectively, related to new securitization transactions accounted for as sales, net of transaction
costs. These gains and losses are included in servicing and securitizations income. The remainder of servicing
and securitizations income represents servicing income and excess interest and non-interest income generated by
the transferred receivables, less the related net losses on the transferred receivables and interest expense related
to the securitization debt.
Note S
Derivative Instruments and Hedging Activities
The Company maintains a risk management strategy that incorporates the use of derivative instruments to
minimize significant unplanned fluctuations in earnings caused by interest rate and foreign exchange rate
volatility. The Company’s goal is to manage sensitivity to changes in rates by modifying the repricing or
maturity characteristics of certain balance sheet assets and liabilities, thereby limiting the impact on earnings. By
using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to
perform, credit risk is equal to the extent of the fair value gain in a derivative. When the fair value of a derivative
contract is positive, this generally indicates that the counterparty owes the Company, and, therefore, creates a
repayment risk for the Company. When the fair value of a derivative contract is negative, the Company owes the
counterparty, and therefore, has no repayment risk. The Company minimizes the credit (or repayment) risk in
derivative instruments by entering into transactions with high-quality counterparties that are reviewed
periodically by the Company’s Asset and Liability Committee, a committee of senior management. The
Company also maintains a policy of requiring that all derivative contracts be governed by an International Swaps
and Derivatives Association Master Agreement; depending on the nature of the derivative transaction, bilateral
collateral agreements may be required as well.
Market risk is the adverse effect that a change in interest rates, currency, or implied volatility rates has on the
value of a financial instrument. The Company manages the market risk associated with interest rate and foreign
exchange contracts by establishing and monitoring limits as to the types and degree of risk that may be
undertaken.
The Company periodically uses interest rate swaps as part of its interest rate risk management strategy. Interest
rate swaps generally involve the exchange of fixed and variable rate interest payments between two parties, based
on a common notional principal amount and maturity date. As a result of interest rate fluctuations, hedged assets
and liabilities will appreciate or depreciate in market value. To the extent that there is a high degree of correlation
between the hedged asset or liability and the derivative instrument, the income or loss generated will generally
offset the effect of this unrealized appreciation or depreciation.
The Company’s foreign currency denominated assets and liabilities expose it to foreign currency exchange risk.
The Company enters into various foreign exchange derivative contracts for managing foreign currency exchange
risk. Changes in the fair value of the derivative instrument effectively offset the related foreign exchange gains or
losses on the items to which they are designated.
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