IBM 1999 Annual Report Download - page 78

notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
76
The company enters into contracts that effectively provide the
company with committed future borrowings in select foreign
currencies. The aggregate notional value of these contracts
was $6.4 billion and $3.0 billion as of December 31, 1999 and
1998, respectively. The terms of these contracts generally are
less than eighteen months. Foreign exchange gains and losses
associated with these contracts are recorded in net income as
they are realized. These amounts have not been and are not
expected to be material to the company’s financial results.
Derivative Financial Instruments
The company uses derivative financial instruments as an element
of its risk management strategy. The company manages the risk
A significant portion of the company’s derivative transactions
relates to matching the interest and foreign currency rate pro-
files of funding liabilities with the interest and foreign currency
rate profiles of global financing and other market risk sensitive
assets. The company issues debt, using the most efficient cap-
ital markets and products, which may result in a currency or
interest rate mismatch with the underlying assets. The company
uses interest rate swaps or currency swaps to match the interest
rate and currency profiles of its debt to the related assets. The
terms of these swap contracts generally are less than five
years. Net interest settlements and currency rate differentials
that accrue under interest rate and currency swap contracts,
respectively, are recognized in interest expense over the life of
the contracts.
The company uses its Global Treasury Centers to manage the
cash of its subsidiaries. These treasury centers principally use
currency swaps to convert cash flows in a cost-effective manner,
predominantly for the company’s European subsidiaries. The
terms of the swaps generally are less than one year. The interest
rate differential in these contracts is recognized in interest
expense over the life of the contracts.
The company also uses currency swaps and other foreign
currency contracts to hedge the foreign currency exposures of
certain of the company’s net investments in foreign subsidiaries.
The currency effects of these hedges are reflected in the
Accumulated gains and losses not affecting retained earnings
section of stockholders’ equity thereby offsetting a portion of
the translation of the net foreign assets.
of nonperformance by counterparties by establishing explicit
dollar and term limitations that correspond to the credit rating
of each carefully selected counterparty. The company has not
sustained a material loss from these instruments nor does it
anticipate any material adverse effect on its results of opera-
tions or financial position in the future.
The following table summarizes the notional value, carrying value
and fair value of the company’s derivative financial instruments
on- and off-balance sheet. The notional value at December 31
provides an indication of the extent of the company’s involvement
in these instruments at that time, but does not represent exposure
to credit, interest rate or foreign exchange rate market risks.
At December 31, 1999 At December 31, 1998
Notional Carrying Fair Notional Carrying Fair
(Dollars in millions) Value Value Value Value Value Value
Interest rate and currency contracts $«29,830 $«(257) $«(491) $«31,484 $«(485) $«(427)
Option contracts 1,705 59 54 9,021 67 45
Total $«31,535 $«(198) $«(437) * $«40,505 $«(418) $«(382) *
Amounts in parentheses are liabilities.
*The estimated fair value of derivatives both on- and off-balance sheet at December 31, 1999 and 1998, comprises assets of $616 million and $486 million
and liabilities of $1,053 million and $868 million, respectively.