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Derivative financial instruments for hedging purposes
 12 Months Ended
Dec. 31, 2011
Derivative financial instruments for hedging purposes
20. Derivative financial instruments for hedging purposes

 

As of December 31, 2011 and 2010, quantitative information on derivative financial instruments held for hedging purposes is as follows:

 

    2011     2010  
(In thousands of US$)   Nominal     Fair Value (1)     Nominal     Fair Value (1)  
    Amount     Asset     Liability     Amount     Asset     Liability  
Fair value hedges:                                                
Interest rate swaps     125,000       16       10,317       267,800       591       25,737  
Cross-currency interest rate swaps     215,107       56       40,574       148,570       24       25,631  
Cash flow hedges:                                                
Interest rate swaps     20,000       -       512       20,000       -       1,499  
Cross-currency interest rate swaps     42,336       3,549       -       42,633       1,407       150  
Forward foreign exchange     53,264       249       2,339       2,108       81       12  
Net investment hedges:                                                
Forward foreign exchange     6,036       289       -       -       -       -  
Total     461,743       4,159       53,742       481,111       2,103       53,029  
                                                 
Net gain (loss) on the ineffective portion of hedging activities (2)     2,849                       (1,446 )                

 

(1) The fair value of assets and liabilities is reported within the derivative financial instruments used for hedging - receivable and payable lines in the consolidated balance sheets, respectively.
(2) Gains and losses resulting from ineffectiveness and credit risk in hedging activities are reported within the derivative financial instruments and hedging line in the consolidated statements of income.

 

 

The gains and losses resulting from activities of derivative financial instruments and hedging recognized in the consolidated statements of income are presented below:

 

2011
(In thousands of US$)    Gain (loss)
recognized 
in OCI
(effective portion)		     Classification of
gain (loss)		     Gain (loss) 
reclassified from 
accumulated 
OCI to
the statements 
of income
(effective portion)		     Gain (loss)
recognized on
derivatives (ineffective portion)		  
Derivatives – cash flow hedge                                
Interest rate swaps     987                          
                                 
Cross-currency interest rate swaps     2,270       Gain (loss) on foreign currency exchange       1,958       -  
                                 
Forward foreign exchange     (2,160 )     Interest income – loans       (124 )     -  
              Interest expense – borrowings       172       -  
      -       Gain (loss) on foreign currency exchange       (2,966 )     -  
Total     1,097               (960 )     -  
                                 
Derivatives – net investment hedge                                
Forward foreign exchange     289       Gain (loss) on foreign currency exchange       -       -  
Total     289               -       -  

 

2010
(In thousands of US$)     Gain (loss)
recognized 
in OCI
(effective portion)		     Classification of
gain (loss)		     Gain (loss) 
reclassified from 
accumulated
OCI to
the statements 
of income
(effective portion)		     Gain (loss)
recognized on
derivatives (ineffective portion)		  
Derivatives – cash flow hedge                                
Interest rate swaps     460                          
                                 
Cross-currency interest rate swaps     1,690       Gain (loss) on foreign currency exchange       1,171       -  
                                 
Forward foreign exchange     (759 )     Interest income - loans       (477 )     -  
      -       Gain (loss) on foreign currency exchange       478       -  
Total     1,391               1,172       -  

 

2009
(In thousands of US$)   Gain (loss)
 recognized 
in OCI
(effective portion)		     Classification of
gain (loss)		     Gain (loss)
reclassified from accumulated 
OCI to the statements 
of income
(effective portion)		     Gain (loss)
recognized on
derivatives (ineffective portion)		  
Derivatives – cash flow hedge                                
Interest rate swaps     513                          
                                 
Cross-currency interest rate swaps     6,231       Gain (loss) on foreign currency exchange       (3,430 )     -  
            Derivative financial instruments and hedging       -       (3 )
                                 
Forward foreign exchange     (4,773 )     Interest expense – borrowings       336       -  
              Interest income - loans       313          
              Gain (loss) on foreign currency exchange       3,861       -  
Total     1,971               1,080       (3 )

 

 

The Bank recognized in earnings the gain (loss) on derivative financial instruments and the gain (loss) of the hedged asset or liability related to qualifying fair value hedges, as follows:

 

2011
(In thousands of US$)   Classification in statements of   Gain (loss) on     Gain (loss) on     Net gain  
    income   derivatives     hedged item     (loss)  
Derivatives -  fair value hedge                      
Interest rate swaps   Interest income – available-for-sale     (6,857 )     10,266       3,409  
    Derivative financial instruments and hedging     74       -       74  
                             
Cross-currency interest rate swaps   Derivative financial instruments and hedging (ineffectiveness)     2,849       -       2,849  
    Interest  income – loans      (33 )     55       22  
    Interest expense – borrowings     4,352       (7,874 )     (3,522 )
    Gain (loss) on foreign currency exchange     (17,427 )     17,475       48  
          (17,042 )     19,922       2,880  

 

2010
(In thousands of US$)   Classification in statements of   Gain (loss) on     Gain (loss) on     Net gain  
    income   derivatives     hedged item     (loss)  
Derivatives -  fair value hedge                      
Interest rate swaps   Interest income – available-for-sale     (14,760 )     22,000       7,240  
    Derivative financial instruments and hedging     419       -       419  
                             
Cross-currency interest rate swaps   Derivative financial instruments and hedging (ineffectiveness)     (1,865 )     -       (1,865 )
    Interest  income – loans     (45 )     89       44  
    Interest expense – borrowings     3,812       (7,046 )     (3,234 )
    Gain (loss) on foreign currency exchange     7,922       (7,994 )     (72 )
          (4,517 )     7,049       2,532  

 

2009
(In thousands of US$)   Classification in statements of   Gain (loss) on     Gain (loss) on     Net gain  
    income   derivatives     hedged item     (loss)  
Derivatives -  fair value hedge                      
Interest rate swaps   Interest income – available-for-sale     (11,959 )     27,477       15.518  
                             
Cross-currency interest rate swaps   Derivative financial instruments and hedging (ineffectiveness)     (2,531 )     -       (2.531 )
    Interest  income – loans     (62 )     619       557  
    Interest expense – borrowings     3,480       (8,098 )     (4.618 )
    Gain (loss) on foreign currency exchange     591       (5,681 )     (5.090 )
          (10,481 )     14,317       3.836  

 

  

For control purposes, derivative instruments are recorded at their nominal amount (“notional amount”) in memorandum accounts. Interest rate swaps are made either in a single currency or cross currency for a prescribed period to exchange a series of interest rate flows, which involve fixed for floating interest payments. The Bank also engages in certain foreign exchange trades to serve customers’ transaction needs and to manage the foreign currency risk. All such positions are hedged with an offsetting contract for the same currency. The Bank manages and controls the risks on these foreign exchange trades by establishing counterparty credit limits by customer and by adopting policies that do not allow for open positions in the credit and investment portfolio. The Bank also uses foreign currency exchange contracts to hedge the foreign exchange risk associated with the Bank’s equity investment in a non-U.S. dollar functional currency foreign subsidiary. Derivative and foreign exchange instruments negotiated by the Bank are executed mainly over-the-counter (OTC). These contracts are executed between two counterparties that negotiate specific agreement terms, including notional amount, exercise price and maturity.

 

The maximum length of time over which the Bank has hedged its exposure to the variability in future cash flows on forecasted transactions is 2.89 years.

 

The Bank estimates that approximately $842 thousand of gains reported in OCI as of December 31, 2011 related to forward foreign exchange contracts are expected to be reclassified into interest expense as an adjustment to yield of hedged liabilities during the twelve-month period ending December 31, 2012.

 

The Bank estimates that approximately $198 thousand of losses reported in OCI as of December 31, 2011 related to forward foreign exchange contracts are expected to be reclassified into interest income as an adjustment to yield of hedged loans during the twelve-month period ending December 31, 2012.

 

Types of Derivatives and Foreign Exchange Instruments

Interest rate swaps are contracts in which a series of interest rate flows in a single currency are exchanged over a prescribed period. The Bank has designated a portion of these derivative instruments as fair value hedges and a portion as cash flow hedges. Cross currency swaps are contracts that generally involve the exchange of both interest and principal amounts in two different currencies. The Bank has designated a portion of these derivative instruments as fair value hedges and a portion as cash flow hedges. Forward foreign exchange contracts represent an agreement to purchase or sell foreign currency at a future date at agreed-upon terms. The Bank has designated these derivative instruments as cash flow hedges and net investment hedges.

 

In addition to hedging derivative financial instruments, the Bank has derivative financial instruments held for trading purposes that have been disclosed in Note 4.