Wells Fargo 2014 Annual Report Download - page 207

Note 16: Derivatives
We primarily use derivatives to manage exposure to market risk,
including interest rate risk, credit risk and foreign currency risk,
and to assist customers with their risk management objectives.
We designate certain derivatives as hedging instruments in a
qualifying hedge accounting relationship (fair value or cash flow
hedge). Our remaining derivatives consist of economic hedges
that do not qualify for hedge accounting and derivatives held for
customer accommodation, trading or other purposes.
Our asset/liability management approach to interest rate,
foreign currency and certain other risks includes the use of
derivatives. Such derivatives are typically designated as fair
value or cash flow hedges, or economic hedges. This helps
minimize significant, unplanned fluctuations in earnings, fair
values of assets and liabilities, and cash flows caused by interest
rate, foreign currency and other market risk volatility. This
approach involves modifying the repricing characteristics of
certain assets and liabilities so that changes in interest rates,
foreign currency and other exposures do not have a significantly
adverse effect on the net interest margin, cash flows and
earnings. As a result of fluctuations in these exposures, hedged
assets and liabilities will gain or lose fair value. In a fair value or
economic hedge, the effect of this unrealized gain or loss will
generally be offset by the gain or loss on the derivatives linked to
the hedged assets and liabilities. In a cash flow hedge, where we
manage the variability of cash payments due to interest rate
fluctuations by the effective use of derivatives linked to hedged
assets and liabilities, the hedged asset or liability is not adjusted
and the unrealized gain or loss on the derivative is generally
reflected in other comprehensive income and not in earnings.
We also offer various derivatives, including interest rate,
commodity, equity, credit and foreign exchange contracts, to our
customers as part of our trading businesses. These derivative
transactions, which involve us engaging in market-making
activities or acting as an intermediary, are conducted in an effort
to help customers manage their market price risks. We usually
offset our exposure from such derivatives by entering into other
financial contracts, such as separate derivative or security
transactions. The customer accommodations and any offsetting
derivatives are treated as customer accommodation, trading and
other derivatives in our disclosures. Additionally, this category
includes embedded derivatives that are required to be accounted
for separately from their host contracts.
The following table presents the total notional or
contractual amounts and fair values for our derivatives.
Derivative transactions can be measured in terms of the notional
amount, but this amount is not recorded on the balance sheet
and is not, when viewed in isolation, a meaningful measure of
the risk profile of the instruments. The notional amount is
generally not exchanged, but is used only as the basis on which
interest and other payments are determined. Derivatives
designated as qualifying hedging instruments and economic
hedges are recorded on the balance sheet at fair value in other
assets or other liabilities. Customer accommodation, trading and
other derivatives are recorded on the balance sheet at fair value
in trading assets, other assets or other liabilities.
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