Discover 2015 Annual Report Download - page 163

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-147-
Fair Value Hedges
The Company is exposed to changes in fair value of certain of its fixed-rate debt obligations due to changes in
interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value of certain fixed-
rate senior notes, securitized debt, bank notes and interest-bearing brokered deposits attributable to changes in LIBOR,
a benchmark interest rate as defined by ASC 815. These interest rate swaps qualify as fair value hedges in accordance
with ASC 815. Changes in both (i) the fair values of the derivatives and (ii) the hedged fixed-rate senior notes,
securitized debt, bank notes and interest-bearing brokered deposits relating to the risk being hedged are recorded in
interest expense. The changes generally provide substantial offset to one another, with any difference, or ineffectiveness
recorded in interest expense. Any basis differences between the fair value and the carrying amount of the hedged item
at the inception of the hedging relationship are amortized to interest expense.
Derivatives Not Designated as Hedges
Interest Rate Swaps
The Company may have, from time to time, interest rate swap agreements that are not designated as hedges.
Such agreements are not speculative and are also used to manage interest rate risk but are not designated for hedge
accounting. Changes in the fair value of these contracts are recorded in other income.
Foreign Exchange Forward Contracts
The Company has foreign exchange forward contracts that are economic hedges and are not designated as
accounting hedges. The Company enters into foreign exchange forward contracts to manage foreign currency risk.
Changes in the fair value of these contracts are recorded in other income.
Forward Delivery Contracts
The Company economically hedged the changes in fair value of IRLCs and mortgage loans held for sale caused
by changes in interest rates by using TBA MBS and entering into best-efforts forward delivery commitments. These
derivative instruments were recorded at fair value with changes in fair value recorded in other income. As previously
disclosed, the Company closed the mortgage origination business it acquired in 2012, and, as a result, the Company
does not have any forward delivery contracts as of December 31, 2015.
Interest Rate Lock Commitments
The Company entered into commitments with consumers to originate residential mortgage loans at a specified
interest rate. The Company reported IRLCs that relate to the origination of mortgage loans that were held for sale as
derivative instruments at fair value with changes in fair value recorded in other income. As previously disclosed, the
Company closed the mortgage origination business it acquired in 2012, and, as a result, the Company does not have
any interest rate lock commitments as of December 31, 2015.