Goldman Sachs 2012 Annual Report Download - page 144

Notes to Consolidated Financial Statements
Interest Rate Hedges
The firm designates certain interest rate swaps as fair value
hedges. These interest rate swaps hedge changes in fair
value attributable to the relevant benchmark interest rate
(e.g., London Interbank Offered Rate (LIBOR)), effectively
converting a substantial portion of fixed-rate obligations
into floating-rate obligations.
The firm applies a statistical method that utilizes regression
analysis when assessing the effectiveness of its fair value
hedging relationships in achieving offsetting changes in the
fair values of the hedging instrument and the risk being
hedged (i.e., interest rate risk). An interest rate swap is
considered highly effective in offsetting changes in fair value
attributable to changes in the hedged risk when the
regression analysis results in a coefficient of determination
of 80% or greater and a slope between 80% and 125%.
For qualifying fair value hedges, gains or losses on
derivatives are included in “Interest expense.” The change
in fair value of the hedged item attributable to the risk being
hedged is reported as an adjustment to its carrying value
and is subsequently amortized into interest expense over its
remaining life. Gains or losses resulting from hedge
ineffectiveness are included in “Interest expense.” When a
derivative is no longer designated as a hedge, any remaining
difference between the carrying value and par value of the
hedged item is amortized to interest expense over the
remaining life of the hedged item using the effective interest
method. See Note 23 for further information about interest
income and interest expense.
The table below presents the gains/(losses) from interest
rate derivatives accounted for as hedges, the related hedged
borrowings and bank deposits, and the hedge
ineffectiveness on these derivatives.
Year Ended December
in millions 2012 2011 2010
Interest rate hedges $(2,383) $ 4,679 $ 1,617
Hedged borrowings and bank deposits 665 (6,300) (3,447)
Hedge ineffectiveness 1(1,718) (1,621) (1,836)
1. Primarily consisted of amortization of prepaid credit spreads resulting from
the passage of time.
The gain/(loss) excluded from the assessment of hedge
effectiveness was not material for the years ended
December 2012, December 2011 and December 2010.
Net Investment Hedges
The firm seeks to reduce the impact of fluctuations in
foreign exchange rates on its net investment in certain non-
U.S. operations through the use of foreign currency forward
contracts and foreign currency-denominated debt. For
foreign currency forward contracts designated as hedges,
the effectiveness of the hedge is assessed based on the
overall changes in the fair value of the forward contracts
(i.e., based on changes in forward rates). For foreign
currency-denominated debt designated as a hedge, the
effectiveness of the hedge is assessed based on changes in
spot rates.
For qualifying net investment hedges, the gains or losses
on the hedging instruments, to the extent effective,
are included in “Currency translation adjustment, net
of tax” within the consolidated statements of
comprehensive income.
The table below presents the gains/(losses) from net
investment hedging.
Year Ended December
in millions 2012 2011 2010
Currency hedges $(233) $ 160 $(261)
Foreign currency-denominated
debt hedges 347 (147) (498)
The gain/(loss) related to ineffectiveness was not material
for the years ended December 2012, December 2011 and
December 2010. The loss reclassified to earnings from
accumulated other comprehensive income was not material
for the years ended December 2012 and December 2010,
and was $186 million for the year ended December 2011.
As of December 2012 and December 2011, the firm had
designated $2.77 billion and $3.11 billion, respectively, of
foreign currency-denominated debt, included in
“Unsecured long-term borrowings” and “Unsecured
short-term borrowings,” as hedges of net investments in
non-U.S. subsidiaries.
142 Goldman Sachs 2012 Annual Report