Citibank 2010 Annual Report Download - page 256

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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 certificates of deposit. 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. Some of 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, while others use regression.
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. Some
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 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. The 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 the gains (losses) on the Company’s fair
value hedges for the years ended December 31, 2010 and December 31, 2009:
Gains (losses) on
fair value hedges (1)
In millions of dollars 2010 2009
Gain (loss) on the derivatives in designated
and qualifying fair value hedges
Interest rate contracts $ 948 $ (4,228)
Foreign exchange contracts 729 863
Total gain (loss) on the derivatives in designated
and qualifying fair value hedges $ 1,677 $(3,365)
Gain (loss) on the hedged item in designated
and qualifying fair value hedges
Interest rate hedges $ (945) $ 4,065
Foreign exchange hedges (579) (373)
Total gain (loss) on the hedged item in
designated and qualifying fair value hedges $(1,524) $ 3,692
Hedge ineffectiveness recognized in
earnings on designated and qualifying
fair value hedges
Interest rate hedges $ (23) $ (179)
Foreign exchange hedges 10 138
Total hedge ineffectiveness recognized in
earnings on designated and qualifying
fair value hedges $ (13) $ (41)
Net gain (loss) excluded from assessment
of the effectiveness of fair value hedges
Interest rate contracts $ 26 $ 16
Foreign exchange contracts 140 352
Total net gain (loss) excluded from assessment
of the effectiveness of fair value hedges $ 166 $ 368
(1) Amounts are included in Other revenue on the Consolidated Statement of Income. The accrued interest
income on fair value hedges is excluded from this table.