In Note K to its 2007 financial statements, IBM includes disclosure about its derivatives as follows:

The following table summarizes the net fair value of the derivative instruments and the carrying value of foreign currency denominated debt designated as a hedge of net investment at December 31, 2007 (included in the Consolidated Statement of Financial Position).

(a) Comprises assets of $181 million and liabilities of $14 million.
(b) Comprises assets of $526 million and liabilities of $438 million.
(c) Comprises liabilities of $937 million.
(d) Comprises assets of $90 million and liabilities of $60 million.
(e) Represents foreign currency denominated debt formally designated as a hedge of net investment.
Accumulated Derivative Gains or Losses
At December 31, 2007, in connection with its cash flow hedges of anticipated royalties and cost transactions, the company recorded net losses of $136 million, net of tax, in Accumulated gains and (losses) not affecting retained earnings. Of this amount, $174 million of losses are expected to be reclassified to net income within the next year, providing an offsetting economic impact against the underlying anticipated transactions. At December 31, 2007, losses of approximately $91 million, net of tax, were recorded in Accumulated gains and (losses) not affecting retained earnings in connection with cash flow hedges of the company's borrowings. Of this amount, $67 million of losses are expected to be reclassified to net income within the next year, providing an offsetting economic impact against the underlying transactions.
The following table summarizes activity in the Accumulated gains and (losses) not affecting retained earnings section of the Consolidated Statement of Stockholders' Equity related to all derivatives classified as cash flow hedges:
(Dollars in millions, net of tax) Debit/(Credit)
December 31, 2004. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 653
Net losses reclassified into earnings from equity during 2005 . . . . . . . . . . . . . . . . . . . . . (104)
Changes in fair value of derivatives in 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (787)
December 31, 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(238)
Net losses reclassified into earnings from equity during 2006 . . .. . . . . . . . . . . . . . . . . . . . 205
Changes in fair value of derivatives in 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
December 31, 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 104
Net losses reclassified into earnings from equity during 2007 . .. . . . . . . . . . . . . . . . . . . . . (116)
Changes in fair value of derivatives in 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
December 31, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . $ 227
For the years ending December 31, 2007, 2006 and 2005, 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 and cash flow 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 uses derivatives to hedge fluctuations in the value of expected future royalty payment collections denominated in foreign currencies. Using IBM's fair value information for anticipated royalty cash flow hedges, state whether the U.S. dollar strengthened or weakened, relative to the foreign currencies in which the royalties are denominated, between the time the derivatives were entered into and December 31, 2007.
3. IBM lists $2,787 million in debt as a hedge. What does this debt hedge, and how does the debt serve as an effective hedge?
4. As of December 31, 2007, IBM has recognized $227 million in net unrealized losses associated with cash flow hedges. Of these net losses, how much is related to cash flow transactions expected to occur within one year?
5. What type of disclosure would give the best indication of IBM's exposure to foreign exchange and interest rate risk?

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Hedge Designation Fair Cash Value Flow nvestment Net Non-Hedge Other (Dollars in millions) Derivatives-net asset/(liabilicy): $167$29 Debt risk management Long-term investments in foreign $ 50 (937) subsidiaries (net investments" Anticipated royalties and cost transactions (203) Subsidiary cash and foreign currency asset/liability management Equity risk management Other derivatives (56) 30 Total derivatives Debt 167A) 89 (937)el 304 Long-term investments in foreign subsidiaries ("net investments") (2.787) $167 $ 88 $(3.724) Total S 30