Capital One 2005 Annual Report Download - page 107

protect against adverse movements in exchange rates. As of December 31, 2005, the Company was not a party to any cross
urrency swaps. c
The Company has entered into forward exchange contracts to reduce the Company’ s sensitivity to foreign currency exchange
rate changes on its foreign currency denominated loans. The forward rate agreements allow the Company to “lock-in”
f nctional currency equivalent cash flows associated with the foreign currency denominated loans. u
During the year ended December 31, 2005, the Company recognized $3.1 million of losses, recorded in other non-interest
income, related to the ineffective portions of its cash flow hedging instruments. During the year ended December 31, 2004,
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, 2005 and December 31, 2004 for cash flow
edges that have been discontinued because the forecasted transaction was no longer probable of occurring. h
At December 31, 2005, the Company expects to reclassify $16.9 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 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
exchange rates. in
For the years ended December 31, 2005 and 2004, net gains of $0.3 million and net losses of $9.1 million, respectively,
related to these derivatives were included in the cumulative translation adjustment.
N
on-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
ird parties. th
The Company uses interest rate swaps in conjunction with its auto securitizations. These swaps have zero balance notional
amounts unless the paydown of auto securitizations differs from its scheduled amortization.
The Company enters into customer-oriented derivative financial instruments, including interest rate swaps, options, caps,
floors, and foreign exchange contracts. These customer-oriented positions are matched with offsetting positions to minimize
risk to the Company.
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, 2005 and 2004, the Company had net gains of $6.6 million and
$4.0 million, respectively, which are recorded in other non-interest income.
Note 23
Significant Concentration of Credit Risk
The Company is active in originating loans in the United States and internationally. International loans are originated
primarily in Canada and the United Kingdom. The Company reviews each potential customer’ s credit application and
evaluates the applicant’ s financial history and ability and willingness to repay. Loans are made on an unsecured and secured
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