Capital One 2004 Annual Report Download - page 114

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During the years ended December 31, 2004 and 2003, the Company recognized no net gains or losses related to
the ineffective portions of its cash flow hedging instruments. The Company recognized no net gains or losses
during the years ended December 31, 2004 and December 31, 2003 for cash flow hedges that have been
discontinued because the forecasted transaction was no longer probable of occurring.
At December 31, 2004, the Company expects to reclassify $19.2 million of net losses, after tax, on derivative
instruments from cumulative other comprehensive income to earnings during the next 12 months as terminated
swaps are amortized and as interest payments and receipts on derivative instruments occur.
Hedge of Net Investment in Foreign Operations
The Company uses cross-currency swaps and forward exchange contracts to protect the value of its investment in
its foreign subsidiaries. Realized and unrealized foreign currency gains and losses from these hedges are not
included in the income statement, but are shown in the translation adjustments in other comprehensive income.
The purpose of these hedges is to protect against adverse movements in exchange rates.
For the years ended December 31, 2004 and 2003, net losses of $9.1 million and $6.0 million related to these
derivatives were included in the cumulative translation adjustment.
Non-Trading Derivatives
The Company uses interest rate swaps to manage interest rate sensitivity related to loan securitizations. The
Company enters into interest rate swaps with its securitization trust and essentially offsets the derivative with
separate interest rate swaps with third parties.
The Company uses interest rate swaps in conjunction with its auto securitizations that are not designated hedges.
These swaps have zero balance notional amounts unless the paydown of auto securitizations differs from its
scheduled amortization.
These derivatives do not qualify as hedges and are recorded on the balance sheet at fair value with changes in
value included in current earnings. During the years ended December 31, 2004 and 2003, the Company had net
gains of $4.0 million and net losses of $2.2 million, respectively. The Company recognized net losses of $2.0
million during the year ended December 31, 2003, for non-trading derivatives that were terminated.
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