Citibank 2009 Annual Report Download - page 229

219
Fair Value Hedges
Hedging of benchmark interest rate risk
Citigroup hedges exposure to changes in the fair value of outstanding fixed-
rate issued debt and borrowings. The fixed cash flows from those financing
transactions are converted to benchmark variable-rate cash flows by entering
into receive-fixed, pay-variable interest rate swaps. These fair value hedge
relationships use dollar-offset ratio analysis to determine whether the
hedging relationships are highly effective at inception and on an ongoing
basis.
Citigroup also hedges exposure to changes in the fair value of fixed-rate
assets, including available-for-sale debt securities and loans. The hedging
instruments used are receive-variable, pay-fixed interest rate swaps. Most
of these fair value hedging relationships use dollar-offset ratio analysis to
determine whether the hedging relationships are highly effective at inception
and on an ongoing basis, while certain others use regression analysis.
Hedging of foreign exchange risk
Citigroup hedges the change in fair value attributable to foreign-exchange
rate movements in available-for-sale securities that are denominated in
currencies other than the functional currency of the entity holding the
securities, which may be within or outside the U.S. The hedging instrument
employed is a forward foreign-exchange contract. In this type of hedge, the
change in fair value of the hedged available-for-sale security attributable
to the portion of foreign exchange risk hedged is reported in earnings and
not Accumulated other comprehensive income—a process that serves
to offset substantially the change in fair value of the forward contract that
is also reflected in earnings. Citigroup considers the premium associated
with forward contracts (differential between spot and contractual forward
rates) as the cost of hedging; this is excluded from the assessment of hedge
effectiveness and reflected directly in earnings. Dollar-offset method is used
to assess hedge effectiveness. Since that assessment is based on changes in
fair value attributable to changes in spot rates on both the available-for-
sale securities and the forward contracts for the portion of the relationship
hedged, the amount of hedge ineffectiveness is not significant.
The following table summarizes certain information related to the Company’s fair value hedges for the year ended December 31, 2009:
In millions of dollars for the year ended December 31, 2009
Gains/(losses) on fair value
hedges (1)
Gain (loss) on fair value designated and qualifying hedges
Interest rate contracts $(4,642)
Foreign exchange contracts 1,202
Total gain (loss) on fair value designated and qualifying hedges $(3,440)
Gain (loss) on the hedged item in designated and qualifying fair value hedges
Interest rate hedges $ 4,549
Foreign exchange hedges (846)
Total gain (loss) on the hedged item in designated and qualifying fair value hedges $ 3,703
Hedge ineffectiveness recognized in earnings on designated and qualifying fair value hedges
Interest rate hedges $ 140
Foreign exchange hedges 137
Total hedge ineffectiveness recognized in earnings on designated and qualifying fair value hedges $ 277
Net gain (loss) excluded from assessment of the effectiveness of fair value hedges
Interest rate contracts $ (233)
Foreign exchange contracts 219
Total net gain/(loss) excluded from assessment of the effectiveness of fair value hedges $ (14)
(1) Amounts are included in Other Revenue on the Consolidated Statement of Income. The accrued interest income on fair value hedges is recorded in Net Interest Revenue and is excluded from this table.