Citibank 2014 Annual Report Download - page 268

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The key requirements to achieve ASC 815 hedge accounting are
documentation of a hedging strategy and specific hedge relationships at
hedge inception and substantiating hedge effectiveness on an ongoing basis.
A derivative must be highly effective in accomplishing the hedge objective of
offsetting either changes in the fair value or cash flows of the hedged item
for the risk being hedged. Any ineffectiveness in the hedge relationship is
recognized in current earnings. The assessment of effectiveness may exclude
changes in the value of the hedged item that are unrelated to the risks being
hedged. Similarly, the assessment of effectiveness may exclude changes
in the fair value of a derivative related to time value that, if excluded, are
recognized in current earnings.
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. These hedges are designated as fair
value hedges of the benchmark interest rate risk associated with the currency
of the hedged liability. The fixed cash flows of the hedged items are converted
to benchmark variable-rate cash flows by entering into receive-fixed,
pay-variable interest rate swaps. These fair value hedge relationships use
either regression or dollar-offset ratio analysis to assess 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. These
fair value hedging relationships use either regression or dollar-offset ratio
analysis to assess whether the hedging relationships are highly effective at
inception and on an ongoing basis.
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 generally a forward foreign-exchange contract. In this 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 (loss)—which serves to
offset the change in fair value of the forward contract that is also reflected in
earnings. Citigroup considers the premium associated with forward contracts
(i.e., the 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.