Citibank 2010 Annual Report Download - page 257

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Cash Flow Hedges
Hedging of benchmark interest rate risk
Citigroup hedges variable cash flows resulting from floating-rate liabilities
and rollover (re-issuance) of short-term liabilities. Variable cash flows
from those liabilities are converted to fixed-rate cash flows by entering into
receive-variable, pay-fixed interest rate swaps and receive-variable, pay-fixed
forward-starting interest rate swaps. These cash-flow hedging relationships
use either regression analysis or dollar-offset ratio analysis to assess whether
the hedging relationships are highly effective at inception and on an ongoing
basis. Since efforts are made to match the terms of the derivatives to those of
the hedged forecasted cash flows as closely as possible, the amount of hedge
ineffectiveness is not significant.
Hedging of foreign exchange risk
Citigroup locks in the functional currency equivalent cash flows of long-
term debt and short-term borrowings that are denominated in a currency
other than the functional currency of the issuing entity. Depending on the
risk management objectives, these types of hedges are designated as either
cash flow hedges of only foreign exchange risk or cash flow hedges of both
foreign exchange and interest rate risk, and the hedging instruments used
are foreign exchange cross-currency swaps and forward contracts. These
cash flow hedge relationships use dollar-offset ratio analysis to determine
whether the hedging relationships are highly effective at inception and on an
ongoing basis.
Hedging total return
Citigroup generally manages the risk associated with highly leveraged
financing it has entered into by seeking to sell a majority of its exposures
to the market prior to or shortly after funding. The portion of the highly
leveraged financing that is retained by Citigroup is hedged with a total
return swap.
The amount of hedge ineffectiveness on the cash flow hedges recognized
in earnings for the years ended December 31, 2010 and December 31, 2009 is
not significant.
The pretax change in Accumulated other comprehensive income (loss)
from cash flow hedges for years ended December 31, 2010 and December 31,
2009 is presented below:
In millions of dollars 2010 2009
Effective portion of cash flow
hedges included in AOCI
Interest rate contracts $ (469) $ 488
Foreign exchange contracts (570) 689
Total effective portion of cash flow
hedges included in AOCI $(1,039) $ 1,177
Effective portion of cash flow
hedges reclassified from AOCI
to earnings
Interest rate contracts $(1,400) $ (1,687)
Foreign exchange contracts (500) (308)
Total effective portion of cash flow
hedges reclassified from AOCI to
earnings (1) $(1,900) $ (1,995)
(1) Included primarily in Other revenue and Net interest revenue on the Consolidated Income Statement.
For cash flow hedges, any changes in the fair value of the end-user
derivative remaining in Accumulated other comprehensive income (loss)
on the Consolidated Balance Sheet will be included in earnings of future
periods to offset the variability of the hedged cash flows when such cash
flows affect earnings. The net loss associated with cash flow hedges expected
to be reclassified from Accumulated other comprehensive income (loss)
within 12 months of December 31, 2010 is approximately $1.5 billion. The
maximum length of time over which forecasted cash flows are hedged is
10 years.
The impact of cash flow hedges on AOCI is also shown in Note 21 to the
Consolidated Financial Statements.