In Note D to its 2011 financial statements, IBM includes disclosure about its derivatives as follows: Note:

Question:

In Note D to its 2011 financial statements, IBM includes disclosure about its derivatives as follows:

Note: AOCI represents Accumulated other comprehensive income/(loss) in Consolidated Statement of Changes in Equity.
(1) See pages 76 and 77 for additional information on the purpose for entering into derivatives not designated as hedging instruments.
(2) Includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.
(3) Includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.
(4) Amount of gain (loss) recognized in income represents ineffectiveness on hedge relationships.
(5) Instruments in net investment hedges include derivative and non-derivative instruments.
At December 31, 2011, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains of $88 million (before taxes) in other comprehensive income; $191 million of gains are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against underlying anticipated transactions. At December 31, 2011, net losses of approximately $5 million (before taxes) were recorded in other comprehensive income/(loss) in connection with cash flow hedges of the company's borrowings; $6 million of losses are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying transactions. For the 12 months ending December 31, 2011, there were no significant gains or losses recognized in earnings representing hedge ineffectiveness or excluded from the assessment of hedge effectiveness (for fair value hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.
1. IBM reports that it uses both fair value and cash flow hedges in its debt risk management program. Most of these hedges are accomplished through interest rate swaps. Some of the interest rate swaps are pay-fixed, receive-variable swaps, and some are pay-variable, receive-fixed swaps. Which of these two types of swaps are fair value hedges, and which are cash flow hedges? Explain.
2. IBM lists $1,884 million in long-term debt as a hedge. What does this debt hedge, and how does the debt serve as an effective hedge?
3. As of December 31, 2011, IBM has recognized $83 million in net unrealized gains associated with cash flow hedges. Of these net gains, how much is related to cash flow transactions expected to occur within one year?
4. What type of disclosure would give the best indication of IBM's exposure to foreign exchange and interest rate risk?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...

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