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52 Ameriprise Financial 2007 Annual Report
December 31, 2007 and remain at that level for 12 months, the
impact to pretax income for the 12 month period without hedging
would be a positive $15 million. The impact of our hedging strategy
offsets that gain for an immaterial net exposure.
Stock Market Certificates
Stock market certificates are purchased for amounts generally from
$1,000 to $1 million for terms of 52 weeks which can be extended to
a maximum of 14 terms. For each term the certificate holder can
choose to participate 100% in any percentage increase in the
S&P 500 Index up to a maximum return or choose partial participa-
tion in any increase in the S&P 500 Index plus a fixed rate of interest
guaranteed in advance. If partial participation is selected, the total of
equity-linked return and guaranteed rate of interest cannot exceed the
maximum return. Reserves for our stock market certificates are
included in customer deposits on our Consolidated Balance Sheets.
Of the $6.2 billion in customer deposits at December 31, 2007,
$1.1 billion pertain to stock market certificates. The notional
amounts and fair value assets (liabilities) of derivatives hedging this
product were as follows:
December 31,
2007 2006
Notional Fair Notional Fair
Amount Value Amount Value
(in millions)
Purchased calls $900 $59 $900 $104
Written calls (965) (27) (962) (56)
Purchased S&P 500
futures(1) 3 — 1 —
(1) These S&P 500 futures are cash settled daily and, therefore, have no fair value.
Interest Rate Risk—Stock Market Certificates
Stock market certificates have some interest rate risk as changes in
interest rates affect the fair value of the payout to be made to the
certificate holder. This exposure to interest rate changes is hedged by
the derivatives listed above. We estimate that if, hypothetically,
interest rates had increased by 100 basis points at December 31, 2007
and remain at that level for 12 months our unhedged exposure would
be a negative impact of $1 million on pretax income for the
12 month period offset by a positive impact of the same amount
from our hedging strategy for an immaterial net exposure.
Equity Price Risk—Stock Market Certificates
As with the equity indexed annuities, the equity-linked return to
investors creates equity price risk exposure. We seek to minimize this
exposure with purchased futures and call spreads that replicate what
we must credit to client accounts. We estimate that if, hypothetically,
equity markets had declined by 10% at December 31, 2007 and
remain at that level for 12 months the impact to pretax income for
the 12 month period without hedging would be a positive
$22 million. The impact of our hedging strategy offsets that gain for
an immaterial net exposure.
Foreign Currency Risk
We have foreign currency risk because of our net investment in
Threadneedle Asset Management Holdings Limited (“Thread-
needle”). We hedge this risk by entering into foreign currency
forward contracts which are adjusted monthly. At December 31, 2007,
we had forward currency contracts with a notional value of
442 million British pounds (“GBP”) hedging 458 million GBP of
exposure. Additionally, we also enter into separate foreign currency
forward contracts to economically hedge our foreign currency risk
related to net income from Threadneedle’s operations. At
December 31, 2007 we had forward currency contracts with a
notional value of 4 million GBP. Our foreign currency risk is
immaterial after hedging.
Interest Rate Risk on External Debt
Interest rate risk on our external debt is not material. The interest
rate on the $1.5 billion of senior unsecured notes is fixed and the
interest rate on the $500 million of junior subordinated notes is fixed
until June 1, 2016. We have floating rate debt of $18 million related
to our municipal bond inverse floater certificates which is not hedged
but on which the interest rate risk to pretax income is not material.
Credit Risk
Our potential derivative credit exposure to each counterparty is
aggregated with all of our other exposures to the counterparty to
determine compliance with established credit and market risk limits
at the time we enter into a derivative transaction. Credit exposures
may take into account enforceable netting arrangements. Before
executing a new type or structure of derivative contract, we determine
the variability of the contract’s potential market and credit exposures
and whether such variability might reasonably be expected to create
exposure to a counterparty in excess of established limits.