AIG 2007 Annual Report Download - page 217

American International Group, Inc. and Subsidiaries
8. Derivatives and Hedge Accounting
Continued
The following table presents the notional amounts by remaining maturity of Capital Markets’ interest rate, credit
default and currency swaps and swaptions derivatives portfolio at December 31, 2007 and 2006:
Remaining Life of Notional Amount*
One Two Through Six Through After Ten Total Total
(in millions) Year Five Years Ten Years Years 2007 2006
Interest rate swaps $441,801 $ 554,917 $156,634 $14,112 $1,167,464 $1,058,279
Credit default swaps 184,924 286,069 85,792 5,028 561,813 483,648
Currency swaps 38,384 135,187 41,675 9,029 224,275 218,091
Swaptions, equity and commodity swaps 57,709 62,849 35,270 23,139 178,967 180,040
Total $722,818 $1,039,022 $319,371 $51,308 $2,132,519 $1,940,058
* Notional amount is not representative of either market risk or credit risk and is not recorded in the consolidated balance sheet.
Futures and forward contracts are contracts that obligate the receives an option premium and then manages the risk of any
holder to sell or purchase foreign currencies, commodities or unfavorable change in the value of the underlying commodity,
financial indices in which the seller/purchaser agrees to currency or index by entering into offsetting transactions with
make/take delivery at a specified future date of a specified third-party market participants. Risks arise as a result of
instrument, at a specified price or yield. Options are contracts that movements in current market prices from contracted prices, and
allow the holder of the option to purchase or sell the underlying the potential inability of the counterparties to meet their obliga-
commodity, currency or index at a specified price and within, or at, tions under the contracts.
a specified period of time. As a writer of options, AIGFP generally
The following table presents Capital Markets futures, forward and option contracts portfolio by maturity and type of
derivative at December 31, 2007 and 2006:
Remaining Life
One Two Through Six Through After Ten Total Total
(in millions) Year Five Years Ten Years Years 2007 2006
Exchange traded futures and options contracts
contractual amount $ 27,588 $1,359 $ — $ — $ 28,947 $ 27,271
Over the counter forward contracts contractual
amount 485,332 5,864 1,850 — 493,046 492,913
Total $512,920 $7,223 $1,850 $ — $521,993 $520,184
AIGFP Credit Default Swaps analyzed and rated by the credit rating agencies. Typically, there
will be an equity layer covering the first credit losses in respect of
AIGFP enters into credit derivative transactions in the ordinary the portfolio up to a specified percentage of the total portfolio,
course of its business. The majority of AIGFP’s credit derivatives and then successive layers ranging from generally a BBB-rated
require AIGFP to provide credit protection on a designated layer to one or more AAA-rated layers. In transactions that are
portfolio of loans or debt securities. AIGFP provides such credit rated with respect to the risk layer or tranche that is immediately
protection on a ‘‘second loss’’ basis, under which AIGFP’s junior to the threshold level above which AIGFP’s payment
payment obligations arise only after credit losses in the desig- obligation would generally arise, a significant majority are rated
nated portfolio exceed a specified threshold amount or level of AAA by the rating agencies. In transactions that are not rated,
‘‘first losses.’’ The threshold amount of credit losses that must AIGFP applies the same risk criteria for setting the threshold level
be realized before AIGFP has any payment obligation is negotiated for its payment obligations. Therefore, the risk layer assumed by
by AIGFP for each transaction to provide that the likelihood of any AIGFP with respect to the designated portfolio in these transac-
payment obligation by AIGFP under each transaction is remote. tions is often called the ‘‘super senior’’ risk layer, defined as the
The underwriting process for these derivatives included assump- layer of credit risk senior to a risk layer that has been rated AAA
tions of severely stressed recessionary market scenarios to by the credit rating agencies, or if the transaction is not rated,
minimize the likelihood of realized losses under these obligations. equivalent thereto.
In certain cases, the credit risk associated with a designated
portfolio is tranched into different layers of risk, which are then
AIG 2007 Form 10-K 163