eTrade 2008 Annual Report Download - page 124

NOTE 9—ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
ACTIVITIES
The Company enters into derivative transactions to protect against the risk of market price or interest rate
movements on the value of certain assets, liabilities and future cash flows. The Company is also required to
recognize certain contracts and commitments as derivatives when the characteristics of those contracts and
commitments meet the definition of a derivative as promulgated by SFAS No. 133, as amended.
Fair Value Hedges
The Company uses a combination of interest rate swaps, forward-starting swaps and purchased options on
swaps to offset its exposure to changes in value of certain fixed-rate assets and liabilities. Changes in the fair
value of the derivatives are recognized currently in earnings. To the extent that the hedge is ineffective, the
changes in the fair values will not offset and the difference, or hedge ineffectiveness, is reflected in other expense
excluding interest in the gain (loss) on loans and securities, net line item in the consolidated statement of income
(loss).
The following table summarizes information related to financial derivatives in fair value hedge relationships
(dollars in thousands):
Notional
Amount of
Derivatives
Fair Value of Derivatives Weighted-Average
Remaining
Life (Years)Asset Liability Net
Pay
Rate
Receive
Rate
Strike
Rate
December 31, 2008:
Receive-fixed interest rate
swaps:
Corporate debt $ 414,500 $20,726 $ — $ 20,726 4.70% 7.38% N/A 4.71
Brokered certificates of
deposit 4,210 8 — 8 1.85% 5.38% N/A 11.21
Total fair value
hedges $ 418,710 $20,734 $ — $ 20,734 4.67% 7.35% N/A 4.77
December 31, 2007:
Pay-fixed interest rate
swaps:
Mortgage-backed
securities $ 527,000 $ — $(21,318) $(21,318) 5.11% 5.16% N/A 7.00
Receive-fixed interest rate
swaps:
Corporate debt 1,214,000 57,760 — 57,760 7.04% 7.71% N/A 5.32
Brokered certificates of
deposit 110,948 — (1,343) (1,343) 4.97% 5.33% N/A 11.46
FHLB advances 100,000 — (194) (194) 5.03% 3.64% N/A 1.79
Purchased interest rate
options(1):
Swaptions 905,000 17,881 — 17,881 N/A N/A 5.40% 10.20
Total fair value
hedges $2,856,948 $75,641 $(22,855) $ 52,786 6.30% 6.68% 5.40% 7.29
(1) Purchased interest rate options were used to hedge mortgage loans and mortgage-backed securities.
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