In Note L to its 2009 financial statements, IBM includes disclosure about its derivatives as follows: For

Question:

In Note L to its 2009 financial statements, IBM includes disclosure about its derivatives as follows:

For the year ended December 31, 2009:

Derivative Instruments Not Consolidated Statement Gain (Loss) Recognized
Designated as Hedging Instruments(1) of Earnings Line Item in Earnings
Foreign exchange contracts..................Other (income) and expense.........$(128)
Equity contracts................................................SG&A expense............177
Total..........................................................................................$ 50
(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) Amount of gain (loss) recognized in income represents amounts excluded from effectiveness assessment.
At December 31, 2009, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net losses of $718 million (before taxes) in accumulated other comprehensive income/(loss); $427 million of losses are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions. At December 31, 2009, net losses of approximately $18 million (before taxes) were recorded in accumulated other comprehensive income/(loss) in connection with cash flow hedges of the company's borrowings; $10 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, 2009, 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 $2,618 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, 2009, IBM has recognized $736 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?
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...