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This excerpt taken from the AIG 10-K filed Mar 2, 2009. AIGFP
Hedging Program
During 2007, AIGFP designated certain interest rate swaps as
fair value hedges of the benchmark interest rate risk on certain
of its interest bearing financial assets and liabilities. In
these hedging relationships, AIG hedged its fixed rate available
for sale securities and fixed rate borrowings. AIGFP also
designated foreign currency forward contracts as fair value
hedges for changes in spot foreign exchange rates of its
non-U.S. dollar
denominated available for sale debt securities. Under these
strategies, all or portions of individual or multiple
derivatives could be designated against a single hedged item.
At inception of each hedging relationship, AIGFP performed and
documented its prospective assessments of hedge effectiveness to
demonstrate that the hedge was expected to be highly effective.
For hedges of interest rate risk, AIGFP used regression analysis
to demonstrate the hedge was highly effective, while it used the
periodic dollar
AIG 2008
Form 10-K 263
Table of Contents
American International Group, Inc.,
and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
offset method for its foreign currency hedges. AIGFP used the
periodic dollar offset method to assess whether its hedging
relationships were highly effective on a retrospective basis.
The prospective and retrospective assessments were updated on a
daily basis. The passage of time component of the hedging
instruments and the forward points on foreign currency hedges
were excluded from the assessment of hedge effectiveness and
measurement of hedge ineffectiveness. AIGFP did not utilize the
shortcut, matched terms or equivalent methods to assess hedge
effectiveness.
The change in fair value of the derivatives that qualified under
the requirements of FAS 133 as fair value hedges was
recorded in current period earnings along with the gain or loss
on the hedged item for the hedged risks. For interest rate
hedges, the adjustments to the carrying value of the hedged
items were amortized into income using the effective yield
method over the remaining life of the hedged item. Amounts
excluded from the assessment of hedge effectiveness were
recognized in current period earnings. For the year ended
December 31, 2007, AIGFP recognized net losses of
$0.7 million in earnings, representing hedge
ineffectiveness, and also recognized net losses of
$456 million related to the portion of the hedging
instruments excluded from the assessment of hedge effectiveness.
Since its election of the Fair Value Option under SFAS 159
on January 1, 2008, AIGFP no longer designates any
derivatives as hedging relationships qualifying for hedge
accounting under FAS 133 under this hedging program.
For the year ended December 31, 2006. AIGFP did not
designate any derivatives as hedging relationships under
FAS 133.
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