Wells Fargo 2011 Annual Report Download - page 188

Note 16: Derivatives (continued)
Fair Value Hedges
We use interest rate swaps to convert certain of our fixed-rate
long-term debt and CDs to floating rates to hedge our exposure
to interest rate risk. We also enter into cross-currency swaps,
cross-currency interest rate swaps and forward contracts to
hedge our exposure to foreign currency risk and interest rate risk
associated with the issuance of non-U.S. dollar denominated
long-term debt. In addition, we use interest rate swaps and
forward contracts to hedge against changes in fair value of
certain investments in available-for-sale debt securities due to
changes in interest rates, foreign currency rates, or both. We also
use interest rate swaps to hedge against changes in fair value for
certain mortgages held for sale. The entire derivative gain or loss
is included in the assessment of hedge effectiveness for all fair
value hedge relationships, except for those involving foreign-
currency denominated securities available for sale and long-term
debt hedged with foreign currency forward derivatives for which
the component of the derivative gain or loss related to the
changes in the difference between the spot and forward price is
excluded from the assessment of hedge effectiveness.
We use statistical regression analysis to assess hedge
effectiveness, both at inception of the hedging relationship and
on an ongoing basis. The regression analysis involves regressing
the periodic change in fair value of the hedging instrument
against the periodic changes in fair value of the asset or liability
being hedged due to changes in the hedged risk(s). The
assessment includes an evaluation of the quantitative measures
of the regression results used to validate the conclusion of high
effectiveness.
The following table shows the net gains (losses) recognized in
the income statement related to derivatives in fair value hedging
relationships.
Interest rate
Foreign exchange
Total net
contracts hedging:
contracts hedging:
gains
(losses)
Securities
Mortgages
Securities
on fair
available
held for
Long-term
available
Long-term
value
(in millions)
for sale
sale
debt
for sale
debt
hedges
Year ended December 31, 2011
Gains (losses) recorded in net interest income
$
(451)
-
1,659
(11)
376
1,573
Gains (losses) recorded in noninterest income
Recognized on derivatives
(1,298)
(21)
2,796
168
512
2,157
Recognized on hedged item
1,232
17
(2,616)
(186)
(445)
(1,998)
Recognized on fair value hedges (ineffective portion) (1)
$
(66)
(4)
180
(18)
67
159
Year ended December 31, 2010
Gains (losses) recorded in net interest income
$
(390)
-
1,755
(4)
374
1,735
Gains (losses) recorded in noninterest income
Recognized on derivatives
(432)
-
1,565
269
(1,030)
372
Recognized on hedged item
469
-
(1,469)
(270)
1,007
(263)
Recognized on fair value hedges (ineffective portion) (1)
$
37
-
96
(1)
(23)
109
(1) Included $53 million and $3 million, respectively, for year ended December 31, 2011 and 2010, of gains (losses) on forward derivatives hedging foreign currency securities
available for sale and long-term debt, representing the portion of derivatives gains (losses) excluded from the assessment of hedge effectiveness (time value).
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