eTrade 2005 Annual Report Download - page 160

Table of Contents
Cash Flow Hedges
Overview of Cash Flow Hedges
The Company uses a combination of interest rate swaps and purchased options on caps and floors to hedge the variability of future
cash flows associated with existing variable-rate liabilities and assets and forecasted issuances of liabilities. These cash flow hedge
relationships are treated as effective hedges as long as the future issuances of liabilities remain probable and the hedges continue to
meet the requirements of SFAS No.133. The Company also enters into interest rate swaps to hedge changes in the future variability of
cash flows of certain investment securities resulting from changes in a benchmark interest rate. Additionally, the Company enters into
forward purchase and sale agreements, which are considered cash flow hedges, when the terms of the commitments exactly match the
terms of the securities purchased or sold.
Changes in the fair value of derivatives that hedge cash flows associated with repurchase agreements, FHLB advances and HELOCs
are reported in AOCI as unrealized gains or losses. The amounts in AOCI are then included in interest expense or interest income as a
yield adjustment during the same periods in which the related interest on the fundings or investment securities affect earnings. During
the upcoming twelve months, the Company expects to include a pre-tax amount of approximately $2.4million of net unrealized gains
that are currently reflected in AOCI in interest expense as a yield adjustment in the same periods in which the related items affect
earnings.
The Company also recognizes cash flow hedge ineffectiveness. Cash flow hedge ineffectiveness is recorded to the extent that the
market value of the derivatives used in the hedge relationship underperforms or outperforms or has a greater increase in market value
than a hypothetical derivative, created to match the exact terms of the underlying debt being hedged. The Company recognized this
cash flow ineffectiveness as fair value adjustment of financial derivatives in the consolidated statements of income. Cash flow
ineffectiveness is re-measured on a quarterly basis.
The following table summarizes information related to our financial derivatives in cash flow hedge relationships, hedging variable rate
liabilities and the forecasted issuances of liabilities (dollars in thousands):
Notional
Amount of
Derivative
Fair Value of Derivatives
Weighted-Average
Asset
Liability
Net
Pay
Rate
Receive
Rate
Strike
Rate
Remaining
Life(Years)
December31, 2005
:
Pay-fixed interest rate
swaps:
Repurchase agreements
$
1,100,000
$
6,959
$
(2,223
)
$
4,736
4.87
%
4.38
%
N/A
9.15
Purchased interest rate
forward-starting swaps:
Repurchase agreements
2,675,000
1,219
(19,872
)
(18,653
)
5.04
%
N/A
N/A
9.50
FHLB advances
750,000
—
(4,040
)
(4,040
)
5.02
%
N/A
N/A
9.46
Purchased interest rate
options
(1)
:
Caps
2,925,000
64,301
—
64,301
N/A
N/A
4.76
%
4.59
Floors
1,900,000
2,527
—
2,527
N/A
N/A
5.50
%
3.54
Total cash flow hedges
$
9,350,000
$
75,006
$
(26,135
)
$
48,871
5.00
%
4.38
%
5.05
%
6.71

2006. EDGAR Online, Inc.