Comerica 2008 Annual Report Download - page 123

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comerica Incorporated and Subsidiaries
related adjustments totaling $6 million. Changes in fair value are recognized in the consolidated income
statements. The following table provides the average unrealized gains and unrealized losses and noninterest
income generated on customer-initiated and other interest rate contracts, energy derivative contracts and foreign
exchange contracts.
Years Ended
December 31
2008 2007
(in millions)
Average unrealized gains ................................................ $459 $137
Average unrealized losses ................................................ 417 120
Noninterest income ................................................... 56 50
Detailed discussions of each class of derivative instruments held or issued by the Corporation for both risk
management and customer-initiated and other activities are as follows.
Interest Rate Swaps
Interest rate swaps are agreements in which two parties periodically exchange fixed cash payments for
variable payments based on a designated market rate or index, or variable payments based on two different rates
or indices, applied to a specified notional amount until a stated maturity. The Corporation’s swap agreements are
structured such that variable payments are primarily based on prime, one-month LIBOR or three-month
LIBOR. These instruments are principally negotiated over-the-counter and are subject to credit risk, market risk
and liquidity risk.
Interest Rate Options, Including Caps and Floors
Option contracts grant the option holder the right to buy or sell an underlying financial instrument for a
predetermined price before the contract expires. Interest rate caps and floors are option-based contracts which
entitle the buyer to receive cash payments based on the difference between a designated reference rate and the
strike price, applied to a notional amount. Written options, primarily caps, expose the Corporation to market
risk but not credit risk. A fee is received at inception for assuming the risk of unfavorable changes in interest
rates. Purchased options contain both credit and market risk. All interest rate caps and floors entered into by the
Corporation are over-the-counter agreements.
Foreign Exchange Contracts
Foreign exchange contracts such as futures, forwards and options are primarily entered into as a service to
customers and to offset market risk arising from such positions. Futures and forward contracts require the
delivery or receipt of foreign currency at a specified date and exchange rate. Foreign currency options allow the
owner to purchase or sell a foreign currency at a specified date and price. Foreign exchange futures are
exchange-traded, while forwards, swaps and most options are negotiated over-the-counter. Foreign exchange
contracts expose the Corporation to both market risk and credit risk. The Corporation also uses foreign
exchange rate swaps and cross-currency swaps for risk management purposes.
Energy Derivative Contracts
The Corporation offers energy derivative contracts, including over-the-counter and NYMEX-based natural
gas and crude oil fixed rate swaps and options, as a service to customers seeking to hedge market risk in the
underlying products. Contract tenors are typically limited to three years to accommodate hedge requirements
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