AIG 2008 Annual Report Download - page 268

The fair values of derivative assets and liabilities on the consolidated balances sheet were as follows:
2008 2007 2008 2007
Derivative Assets Derivative Liabilities
At December 31,
(In millions)
AIGFP derivatives ............................. $12,111 $12,319 $4,344 $14,817
Non-AIGFP derivatives ......................... 1,662 1,785 1,894 3,214
Total ....................................... $13,773 $14,104 $6,238 $18,031
AIGFP Derivatives
AIGFP enters into derivative transactions to mitigate risk in its exposures (interest rates, currencies, com-
modities, credit and equities) arising from its transactions. In most cases, AIGFP did not hedge its exposures related
to the credit default swaps it had written. As a dealer, AIGFP structured and entered into derivative transactions to
meet the needs of counterparties who may be seeking to hedge certain aspects of such counterparties’ operations or
obtain a desired financial exposure.
AIGFP’s derivative transactions involving interest rate swap transactions generally involve the exchange of
fixed and floating rate interest payment obligations without the exchange of the underlying notional amounts.
AIGFP typically became a principal in the exchange of interest payments between the parties and, therefore, is
exposed to counterparty credit risk and may be exposed to loss, if counterparties default. Currency, commodity, and
equity swaps are similar to interest rate swaps, but involve the exchange of specific currencies or cashflows based on
the underlying commodity, equity securities or indices. Also, they may involve the exchange of notional amounts at
the beginning and end of the transaction. Swaptions are options where the holder has the right but not the obligation
to enter into a swap transaction or cancel an existing swap transaction.
AIGFP follows a policy of minimizing interest rate, currency, commodity, and equity risks associated with
securities available for sale by entering into internal offsetting positions, on a security by security basis within its
derivatives portfolio, thereby offsetting a significant portion of the unrealized appreciation and depreciation. In
addition, to reduce its credit risk, AIGFP has entered into credit derivative transactions with respect to $635 million
of securities to economically hedge its credit risk. As previously discussed, these economic offsets did not meet the
hedge accounting requirements of FAS 133 and, therefore, are recorded in Other income in the Consolidated
Statement of Income.
Notional amount represents a standard of measurement of the volume of swaps business of AIGFP. Notional
amount is not a quantification of market risk or credit risk and is not recorded on the consolidated balance sheet.
Notional amounts generally represent those amounts used to calculate contractual cash flows to be exchanged and
are not paid or received, except for certain contracts such as currency swaps.
The timing and the amount of cash flows relating to AIGFP’s foreign exchange forwards and exchange traded
futures and options contracts are determined by each of the respective contractual agreements.
262 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)