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1 DENTSPLY INTERNATIONAL INC /DE/
NOTE 10 – FINANCIAL INSTRUMENTS AND DERIVATIVES

On January 1, 2009, the Company adopted the new accounting guidance for expanded disclosures about derivative instruments and hedging activities.  As a result the Company has expanded its disclosures about its strategies, objectives and risks for using derivative instruments.  In addition, the Company has disclosed the fair value of derivative instruments and their gains and losses in tabular format as required.  The adoption of this new guidance did not have a material impact on the Company’s financial statements.

Derivative Instruments and Hedging Activities
 
The Company's activities expose it to a variety of market risks, which primarily include the risks related to the effects of changes in foreign currency exchange rates, interest rates and commodity prices.  These financial exposures are monitored and managed by the Company as part of its overall risk management program. The objective of this risk management program is to reduce the volatility that these market risks may have on the Company's operating results and equity.
 
Certain of the Company's inventory purchases are denominated in foreign currencies, which expose the Company to market risk associated with exchange rate movements.  The Company's policy generally is to hedge major foreign currency transaction exposures through foreign exchange forward contracts.  These contracts are entered into with major financial institutions thereby minimizing the risk of credit loss.  In addition, the Company's investments in foreign subsidiaries are denominated in foreign currencies, which create exposures to changes in exchange rates.  The Company uses debt and derivatives denominated in the applicable foreign currency as a means of hedging a portion of this risk.
 
With the Company’s significant level of variable interest rate long-term debt and net investment hedges, changes in the interest rate environment can have a major impact on the Company’s earnings, depending upon its interest rate exposure.  As a result, the Company manages its interest rate exposure with the use of interest rate swaps, when appropriate, based upon market conditions.
 
The manufacturing of some of the Company’s products requires the use of commodities, which are subject to market fluctuations.  In order to limit the unanticipated impact on earnings from such market fluctuations, the Company selectively enters into commodity swaps for certain materials used in the production of its products.  Additionally, the Company uses non-derivative methods, such as the precious metal consignment agreements to effectively hedge commodity risks.

Cash Flow Hedges

The Company uses interest rate swaps to convert a portion of its variable interest rate debt to fixed interest rate debt.  As of September 30, 2009, the Company has three groups of significant variable interest rate to fixed rate interest rate swaps.  One of the groups of swaps has notional amounts totaling 12.6 billion Japanese yen, and effectively converts the underlying variable interest rates to an average fixed interest rate of 1.6% for a term of ten years, ending in September 2012.  Another swap has a notional amount of 65.0 million Swiss francs, and effectively converts the underlying variable interest rates to a fixed interest rate of 4.2% for a term of seven years, ending in September 2012.  A third group of swaps has a notional amount of $150.0 million, and effectively converts the underlying variable interest rates to a fixed interest rate of 3.9% for a term of two years, ending March 2010.  The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes.
 
The Company selectively enters into commodity swaps to effectively fix certain variable raw material costs.  At September 30, 2009, the Company had swaps in place to purchase 948 troy ounces of platinum bullion for use in the production of its impression material products.  The average fixed rate of this agreement is $1,240 per troy ounce.  In addition, the Company had swaps in place to purchase 85,428 troy ounces of silver bullion for use in the production of its amalgam products at an average fixed rate of $14 per troy ounce.
 
The Company enters into forward exchange contracts to hedge the foreign currency exposure of its anticipated purchases of certain inventory.  In addition, exchange contracts are used by certain of the Company's subsidiaries to hedge intercompany inventory purchases, which are denominated in non-local currencies.  The forward contracts that are used in these programs typically mature in twelve months or less.  For these derivatives which qualify as hedges of future anticipated cash flows, the effective portion of changes in fair value is temporarily deferred in AOCI and then recognized in earnings when the hedged item affects earnings.

Hedges of Net Investments in Foreign Operations

The Company has numerous investments in foreign subsidiaries.  The net assets of these subsidiaries are exposed to volatility in currency exchange rates.  Currently, the Company uses non-derivative financial instruments, including foreign currency denominated debt held at the parent company level and derivative financial instruments to hedge some of this exposure.  Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in the non-derivative and derivative financial instruments designated as hedges of net investments.
 
In the first quarter of 2005, the Company entered into cross currency interest rate swaps with a notional principal value of Swiss francs 457.5 million paying three month Swiss franc London Inter-Bank Offered Rate (“LIBOR”) and receiving three month U.S. dollar LIBOR on $384.4 million.  In the first quarter of 2006, the Company entered into additional cross currency interest rate swaps with a notional principal value of Swiss francs 55.5 million paying three month Swiss franc LIBOR and receiving three month U.S. dollar LIBOR on $42.0 million.  In the fourth quarter of 2006, the Company entered into additional cross currency interest rate swaps with a notional principal value of Swiss francs 80.4 million paying three month Swiss franc LIBOR and receiving three month U.S. dollar LIBOR on $64.4 million.  In the first quarter of 2007, the Company entered into additional cross currency interest rate swaps with a notional principal value of Swiss francs 56.6 million paying three month Swiss franc LIBOR and receiving three month U.S. dollar LIBOR on $46.3 million.  Additionally, in the fourth quarter of 2005, the Company entered into cross currency interest rate swaps with a notional principal value of Euro 358.0 million paying three month Euro LIBOR and receiving three month U.S. dollar LIBOR on $419.7 million.  In the first quarter of 2009, the Company terminated Swiss francs 57.5 million cross currency swap at a fair value of zero. In the second and third quarters of 2009, the Company amended certain of its Swiss franc and Euro cross currency interest rate swaps to extend their maturity dates for an additional three years.  Specifically, a total of Swiss francs 300 million have been extended to March and April of 2013 and a total of Euro 250 million have been extended to December 2013.  The Swiss franc and Euro cross currency interest rate swaps are designated as net investment hedges of the Swiss and Euro denominated net assets.  The interest rate differential is recognized in the earnings as interest income or interest expense as it is accrued, the foreign currency revaluation is recorded in AOCI, net of tax effects.
 
The fair value of these cross currency interest rate swap agreements is the estimated amount the Company would (pay)/ receive at the reporting date, taking into account the effective interest rates and foreign exchange rates.  As of September 30, 2009, the estimated net fair values of the swap agreements were negative $186.8 million, which are recorded in AOCI, net of tax effects, and as other noncurrent liabilities and other noncurrent assets.

At September 30, 2009, the Company had Euro-denominated, Swiss franc-denominated, and Japanese yen-denominated debt and cross currency interest rate swaps (at the parent company level) to hedge the currency exposure related to a designated portion of the net assets of its European, Swiss and Japanese subsidiaries.  At September 30, 2009 and 2008, the accumulated translation gains on investments in foreign subsidiaries, primarily denominated in Euros, Swiss francs and Japanese yen, net of these net investment hedges, were $130.8 million and $101.4 million, respectively, which are included in AOCI, net of tax effects.

The following tables summarize the fair value of the Company’s derivatives at September 30, 2009.
 
 
   
Notional Amounts
   
Fair Value (Liability) Asset
 
Foreign Exchange Forward Contracts
 
2009
   
2010
   
2009
 
(in thousands)
                 
Forward sale, 9.9 million Australian dollars
  $ 7,230     $ 1,504     $ (324 )
Forward purchase, 6.2 million British pounds
    (3,506 )     (6,441 )     (6 )
Forward sale, 14.3 million Canadian dollars
    2,901       10,482       (1,202 )
Forward purchase, 75.5 million Swiss francs
    (72,840 )     -       2,753  
Forward sale, 5.7 million Danish Krone
    1,118       -       10  
Forward purchase, 8.8 million Euros
    (16,317 )     3,359       431  
Forward sale, 45.7 million Japanese yen
    9,075       (8,566 )     1,010  
Forward sale, 93.4 million Mexican Pesos
    6,923       -       100  
Forward sale, 10.0 million Taiwanese dollars
    310       -       (9 )
 Total Foreign Exchange Forward Contracts
  $ (65,106 )   $ 338     $ 2,763  
                         
 
   
Notional Amount
   
Fair Value Liability
 
Interest Rate Swaps
 
2009
   
2010
   
2011
   
2012
   
2013 and Beyond
   
2009
 
(in thousands)
                                   
Euro
  $ 366     $ 2,101     $ 1,383     $ 1,383     $ 5,880     $ (876 )
Japanese yen
    -       -       -       139,996       -       (3,364 )
Swiss francs
    -       -       -       62,739       -       (4,968 )
US dollars
    -       150,000       -       -       -       (2,229 )
 
 Total Interest Rate Swaps
  $ 366     $ 152,101     $ 1,383     $ 204,118     $ 5,880     $ (11,437 )

   
Notional Amount
   
Fair Value Liability
 
Cross Currency Basis Swaps
 
2009
   
2010
   
2011
   
2012
   
2013 and Beyond
   
2009
 
(in thousands)
     
Swiss franc 592.5 million @ 1.21 pay CHF 3mo. LIBOR rec. USD 3mo. LIBOR
  $ -     $ 150,090     $ 77,603     $ 54,631     $ 289,563     $ (83,060 )
Euros 358.0 million @ $1.17
  pay EUR 3mo. LIBOR rec.    USD 3mo. LIBOR
                                               
    -       158,201       -       -       366,206       (103,765 )
   Total Cross Currency Basis Swaps
  $ -     $ 308,291     $ 77,603     $ 54,631     $ 655,769     $ (186,825 )
                                                 

   
Notional Amount
   
Fair Value Asset
 
Commodity Contracts
 
2009
   
2010
   
2011
   
2012
   
2013 and Beyond
   
2009
 
 (in thousands)
                                   
Silver Swap - U.S. dollar
  $ (713 )   $ (449 )   $ -     $ -     $ -     $ 244  
Platinum Swap - U.S. dollar
    (723 )     (452 )     -       -       -       46  
   Total Commodity Contracts
  $ (1,436 )   $ (901 )   $ -     $ -     $ -     $ 290  

 
 As of September 30, 2009, $3.9 million of deferred net losses on derivative instruments recorded in AOCI are expected to be reclassified to current earnings during the next twelve months.  This reclassification is primarily due to the sale of inventory that includes previously hedged purchases and interest rate swaps.  The maximum term over which the Company is hedging exposures to variability of cash flows (for all forecasted transactions, excluding interest payments on variable interest rate debt) is eighteen months.  Overall, the derivatives designated as cash flow hedges are highly effective.  Any cash flows associated with these instruments are included in cash from operations in accordance with the Company’s policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.

The following tables summarize the fair value and balance sheet location of the Company’s derivatives:

 
Balance Sheet
     
Asset Derivatives Designated as Hedging Instruments
Classification
 
2009
 
(in thousands)
       
Foreign exchange contracts
Other current assets (a)
  $ 1,222  
Foreign exchange contracts
Other noncurrent assets, net
    3  
Commodity contracts
Other current assets (a)
    290  
Total Asset Derivatives Designated as Hedging Instruments
    $ 1,515  
           
Asset Derivatives Not Designated as Hedging Instruments
         
Foreign exchange contracts
Other current assets (a)
  $ 3,423  
           
Total asset derivatives
    $ 4,938  
           

(a)  
Reported on the Condensed Consolidated Balance Sheet within “Prepaid expenses and other current assets.”

 
Balance Sheet
     
Liability Derivatives Designated as Hedging Instruments
Classification
 
2009
 
(in thousands)
       
Interest rate contracts
 Accrued liabilities
  $ 7,141  
Interest rate contracts
 Other noncurrent liabilities
    3,420  
Foreign exchange contracts
 Accrued liabilities
    1,350  
Foreign exchange contracts
 Other noncurrent liabilities
    6  
Cross currency interest rate swaps
 Accrued liabilities
    24,262  
Cross currency interest rate swaps
 Other noncurrent liabilities
    162,563  
Total liability derivatives designated as hedging instruments
    $ 198,742  
           

 
Balance Sheet
     
Liability Derivatives Not Designated as Hedging Instruments
Classification
 
2009
 
Interest rate contracts
 Other noncurrent liabilities
  $ 876  
Foreign exchange contracts
 Accrued liabilities
    529  
Total liability derivatives not designated as hedging instruments
    $ 1,405  
Total liability derivatives
    $ 200,147  
           


The following table summarizes the income statement impact of the Company’s cash flow hedges for the three and nine months ended September 30, 2009:

Three Months Ended September 30,
 
Derivatives in Cash Flow
         
(Loss) Gain
 
Hedging Relationships
 
(Loss) Gain
 
Statement of Operations
 
Reclassified from
 
(in thousands)
 
in AOCI (a)
 
Classification
 
AOCI into income (b)
 
Interest rate contracts
  $ (2,051 )
Interest expense
  $ (2,252 )
Foreign exchange contracts
    (243 )
Cost of products sold
    (302 )
Foreign exchange contracts
    (449 )
SG&A expenses
    240  
Commodity contracts
    343  
Cost of products sold
    (190 )
Total
  $ (2,400 )     $ (2,504 )
                   
                   
Nine Months Ended September 30,
 
Derivatives in Cash Flow
           
(Loss) Gain
 
Hedging Relationships
 
(Loss) Gain
 
Statement of Operations
 
Reclassified from
 
(in thousands)
 
in AOCI (a)
 
Classification
 
AOCI into income (b)
 
Interest rate contracts
  $ (3,425 )
Interest expense
  $ (5,594 )
Foreign exchange contracts
    (501 )
Cost of products sold
    1,106  
Foreign exchange contracts
    431  
SG&A expenses
    434  
Commodity contracts
    1,465  
Cost of products sold
    (1,095 )
Total
  $ (2,030 )     $ (5,149 )
                   



     
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
Derivatives in Cash Flow
Statement of
 
(Loss) Gain
   
Loss
 
Hedging Relationships
Operations
 
Recognized
   
Recognized
 
(in thousands)
Classification
 
in Income (c)
   
in Income (c)
 
Interest rate contracts
Other expense, net
  $ (54 )   $ (155 )
Foreign exchange contracts
Interest expense
    (54 )     (235 )
Foreign exchange contracts
Interest expense
    13       (35 )
Commodity contracts
Interest expense
    (9 )     (38 )
Total
    $ (104 )   $ (463 )
                   


 
(a)  Amount of gain or (loss) reported in AOCI, effective portion.
 
(b)  Amount of gain or (loss) reclassed from AOCI into income, effective portion only.
(c)  Amount of gain or (loss) recognized in income, ineffective portion and amount excluded from effectiveness testing.

The following tables summarize the statement of operations impact of the Company’s hedges of net investment for the three and nine months end September 30, 2009:

Three Months Ended September 30,
 
Derivatives in Net Investment
     
Statement of
 
Gain (Loss)
 
Hedging Relationships
     
Operations
 
Recognized
 
(in thousands)
 
Loss in AOCI (a)
 
Classification
 
in Income (b)
 
Cross currency interest rate swaps
  $ (25,826 )
Interest Income
  $ 190  
Cross currency interest rate swaps
    (21,525 )
Interest Expense
    (896 )
Total
  $ (47,351 )     $ (706 )
                   
                   
Nine Months Ended September 30,
 
Derivatives in Net Investment
       
Statement of
 
Gain (Loss)
 
Hedging Relationships
       
Operations
 
Recognized
 
(in thousands)
 
Loss in AOCI (a)
 
Classification
 
in Income (b)
 
Cross currency interest rate swaps
  $ (12,911 )
Interest Income
  $ 1,402  
Cross currency interest rate swaps
    (25,054 )
Interest Expense
    (3,340 )
Total
  $ (37,965 )     $ (1,938 )
                   

The following tables summarize the statement of operations impact of the Company’s hedges not designated as hedging for the three and nine months end September 30, 2009:

               
Derivatives Not Designated as Hedging
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
Instruments under Hedging
Statement of
 
Gain (Loss)
   
Loss
 
Relationship
Operations
 
Recognized in
   
Recognized in
 
(in thousands)
Classification
 
Income (b)
   
Income (b)
 
Foreign exchange contracts
Other expense, net
  $ 2,485     $ (13,428 )
Interest rate contracts
Other expense, net
    -       (2 )
Interest rate contracts
Interest Expense
    (124 )     (390 )
      $ 2,361     $ (13,820 )
                   

(a)  Amount of loss reported in AOCI, effective portion.
 
(b)  Amount of gain or (loss) recognized in income, ineffective portion and amount excluded from effectiveness testing.

Amounts recorded in AOCI related to cash flow hedging instruments follow:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in thousands, net of tax)
 
2009
   
2008
   
2009
   
2008
 
Beginning balance
  $ (6,005 )   $ 345     $ (7,874 )   $ (1,573 )
                                 
Changes in fair value of derivatives
    (1,506 )     (2,444 )     (1,152 )     (411 )
Reclassifications to earnings from equity
    1,526       (407 )     3,041       (522 )
Total activity
    20       (2,851 )     1,889       (933 )
Ending balance
  $ (5,985 )   $ (2,506 )   $ (5,985 )   $ (2,506 )
                                 

Amounts recorded in AOCI related to hedges of net investments in foreign operations follow:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in thousands, net of tax)
 
2009
   
2008
   
2009
   
2008
 
Beginning balance
  $ 93,272     $ 190,074     $ 77,585     $ 156,790  
                                 
Foreign currency translation adjustment
    74,264       (166,398 )     78,776       (58,311 )
Changes in fair value of:
                               
     foreign currency debt
    (7,673 )     5,752       (2,260 )     (4,488 )
     derivative hedge instruments
    (29,073 )     71,977       (23,311 )     7,414  
Total activity
    37,518       (88,669 )     53,205       (55,385 )
Ending balance
  $ 130,790     $ 101,405     $ 130,790     $ 101,405  
                                 

2 Liberty Media Corporation and Subsidiaries

(8)        Financial Instruments

  

The Company's financial instruments are summarized as follows:

  

                   Type of                  

September 30,

    December 31,

         financial instrument        

       2009      

        2008       

  

  

           amounts in millions         

  

Assets

  

  

  

      Equity collars (1)

$        1,036

             2,392

  

      Other

                --

                 93

  

  

          1,036

             2,485

  

Less current portion

         (1,036)

            (1,157)

  

  

$              --

             1,328

  

Liabilities

  

  

  

      Borrowed shares

$           865

                392

  

      Other

             352

                350

  

  

          1,217

                742

  

Less current portion

         (1,007)

               (553)

  

  

$           210

                189

  

  

                                               

(1)       Represents the Company's Sprint equity collars at September 30, 2009.  The Company has made borrowings against substantially all of the future cash proceeds to be received by the Company upon expiration of these equity collars.  See note 10.

  

Realized and Unrealized Gains (Losses) on Financial Instruments

Realized and unrealized gains (losses) on financial instruments are comprised of changes in the fair value of the following:

  

  

    Nine months ended      

  

        September 30,          

  

    2009   

    2008   

  

amounts in millions

  

  

  

Non-strategic Securities

$     1,008

      (1,889)

Exchangeable senior debentures

         (771)

          866

Equity collars

         (375)

          443

Borrowed shares

         (314)

          585

Other derivatives

            45

         (250)

  

$       (407)

         (245)

  

3 M&T BANK CORP
9. Derivative financial instruments
As part of managing interest rate risk, the Company enters into interest rate swap agreements to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate swap agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain master netting and collateral provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts is not significant as of September 30, 2009.
          The net effect of interest rate swap agreements was to increase net interest income by $10 million and $5 million for the three months ended September 30, 2009 and 2008, respectively, and $27 million and $11 million for the nine months ended September 30, 2009 and 2008, respectively. Information about interest rate swap agreements entered into for interest rate risk management purposes summarized by type of financial instrument the swap agreements were intended to hedge follows:
                                 
                    Weighted-  
    Notional     Average     average rate  
    amount     maturity     Fixed     Variable  
    (in thousands)     (in years)                  
September 30, 2009
                               
Fair value hedges:
                               
Fixed rate time deposits (a)
  $ 25,000       4.0       5.30 %     0.36 %
Fixed rate long-term borrowings (a)
    1,037,241       6.7       6.33       2.24  
 
                       
 
  $ 1,062,241       6.7       6.30 %     2.19 %
 
                       
 
                               
December 31, 2008
                               
Fair value hedges:
                               
Fixed rate time deposits (a)
  $ 70,000       6.1       5.14 %     2.04 %
Fixed rate long-term borrowings (a)
    1,037,241       7.5       6.33       4.28  
 
                       
 
  $ 1,107,241       7.4       6.25 %     4.14 %
 
                       
 
(a)   Under the terms of these agreements, the Company receives settlement amounts at a fixed rate and pays at a variable rate.
          The Company utilizes commitments to sell residential and commercial real estate loans to hedge the exposure to changes in the fair value of real estate loans held for sale. Such commitments have generally been designated as fair value hedges. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in fair value of certain commitments to originate real estate loans for sale.
          For derivatives designated and qualifying as fair value hedges, the fair values of the derivatives and changes in the fair values of the hedged items are recorded in the Company’s consolidated balance sheet with the corresponding gain or loss recognized in current earnings. The difference between changes in the fair values of the interest rate swap agreements and the hedged items represents hedge ineffectiveness and is recorded in “other revenues from operations” in the consolidated statement of income. In a cash flow hedge, the effective portion of the derivative’s unrealized gain or loss is initially recorded as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the unrealized gain or loss is reported in “other revenues from operations” immediately. The amount of hedge ineffectiveness recognized in the three- and nine month periods ended September 2009 and 2008 was not material to the Company’s results of operations.
          Derivative financial instruments used for trading purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading purposes had notional values of $14.7 billion and $14.6 billion at September 30, 2009 and December 31, 2008, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading purposes aggregated $809 million and $713 million at September 30, 2009 and December 31, 2008, respectively.
          Information about the fair values of derivative instruments in the Company’s consolidated balance sheet and consolidated statement of income follows:
                                 
    Asset derivatives     Liability derivatives  
    Fair value     Fair value  
    September 30,     December 31,     September 30,     December 31,  
    2009     2008     2009     2008  
    (in thousands)  
Derivatives designated and qualifying as hedging instruments
                               
Fair value hedges:
                               
Interest rate swap agreements (a)
  $ 83,069       146,111     $        
Commitments to sell real estate loans (a)
    115       1,128       5,097       13,604  
 
                       
 
    83,184       147,239       5,097       13,604  
 
                               
Derivatives not designated and qualifying as hedging instruments
                               
Mortgage-related commitments to originate real estate loans for sale (a)
    13,958       11,132       38       2,988  
Commitments to sell real estate loans (a)
    426       5,875       7,982       8,876  
Trading:
                               
Interest rate contracts (b)
    386,240       513,230       357,363       481,671  
Foreign exchange and other option and futures contracts (b)
    27,917       38,885       27,162       39,408  
 
                       
 
    428,541       569,122       392,545       532,943  
 
                       
 
                               
Total derivatives
  $ 511,725       716,361     $ 397,642       546,547  
 
                       
 
(a)   Asset derivatives are reported in other assets and liability derivatives are reported in other liabilities.
 
(b)   Asset derivatives are reported in trading account assets and liability derivatives are reported in other liabilities.
                                 
    Amount of unrealized gain (loss) recognized  
    Three months ended     Three months ended  
    September 30, 2009     September 30, 2008  
    Derivative     Hedged item     Derivative     Hedged item  
    (in thousands)  
Derivatives in fair value hedging relationships
                               
 
                               
Interest rate swap agreements:
                               
Fixed rate time deposits (a)
  $ (133 )     133       (171 )     165  
Fixed rate long-term borrowings (a)
    19,265       (18,349 )     12,905       (12,080 )
 
                       
 
                               
Total
  $ 19,132       (18,216 )     12,734       (11,915 )
 
                       
 
                               
Derivatives not designated as hedging instruments
                               
 
                               
Trading:
                               
Interest rate contracts (b)
  $ (1,421 )             642          
Foreign exchange and other option and futures contracts (b)
    604               (285 )        
 
                           
 
                               
Total
  $ (817 )             357          
 
                           
                                 
    Amount of unrealized gain (loss) recognized  
    Nine months ended     Nine months ended  
    September 30, 2009     September 30, 2008  
    Derivative     Hedged item     Derivative     Hedged item  
    (in thousands)  
Derivatives in fair value hedging relationships
                               
 
                               
Interest rate swap agreements:
                               
Fixed rate time deposits (a)
  $ (1,527 )     1,520       (1,596 )     1,574  
Fixed rate long-term borrowings (a)
    (62,452 )     58,476       (10,765 )     10,975  
 
                       
 
                               
Total
  $ (63,979 )     59,996       (12,361 )     12,549  
 
                       
 
                               
Derivatives not designated as hedging instruments
                               
 
                               
Trading:
                               
Interest rate contracts (b)
  $ (2,778 )             4,511          
Foreign exchange and other option and futures contracts (b)
    1,536               491          
 
                           
 
                               
Total
  $ (1,242 )             5,002          
 
                           
 
(a)   Reported as other revenues from operations.
 
(b)   Reported as trading account and foreign exchange gains.
          In addition, the Company also has commitments to sell and commitments to originate residential and commercial real estate loans, which are considered derivatives. The Company designates certain of the commitments to sell real estate loans as fair value hedges of real estate loans held for sale. Changes in unrealized gains and losses are included in mortgage banking revenues and, in general, are realized in subsequent periods as the related loans are sold and commitments satisfied. Those unrealized gains and losses reflect both changes in the value of loans and commitments as well as changes in volume of the loans and commitments outstanding as of each respective period-end date. For the three months ended September 30, 2009, net unrealized pre-tax losses of $22,672,000 related to commitments to sell real estate loans, net unrealized pre-tax gains of $4,244,000 related to commitments to originate real estate loans and net unrealized pre-tax gains of $8,308,000 related to hedged real estate loans held for sale were recognized in the consolidated statement of income. For the three months ended September 30, 2008, net unrealized pre-tax gains of $4,505,000 related to commitments to sell real estate loans, net unrealized pre-tax losses of $5,834,000 related to commitments to originate real estate loans and net unrealized pre-tax gains of $1,048,000 related to hedged real estate loans held for sale were recognized in the consolidated statement of income. For the nine months ended September 30, 2009, net unrealized pre-tax gains of $2,939,000 related to commitments to sell real estate loans, net unrealized pre-tax gains of $5,654,000 related to commitments to originate real estate loans and net unrealized pre-tax losses of $3,302,000 related to hedged real estate loans held for sale were recognized in the consolidated statement of income. For the nine months ended September 30, 2008, net unrealized pre-tax gains of $11,430,000 related to commitments to sell real estate loans, net unrealized pre-tax losses of $4,952,000 related to commitments to originate real estate loans and net unrealized pre-tax losses of $6,606,000 related to hedged real estate loans held for sale were recognized in the consolidated statement of income.
          The aggregate fair value of derivative financial instruments in a net liability position at September 30, 2009 for which the Company was required to post collateral was $266 million. The fair value of collateral posted for such instruments was $260 million.
          The Company’s credit exposure with respect to the estimated fair value as of September 30, 2009 of interest rate swap agreements used for managing interest rate risk has been substantially mitigated through master netting arrangements with trading account interest rate contracts with the same counterparties as well as counterparty postings of $54 million of collateral with the Company.
4 MARRIOTT INTERNATIONAL INC /MD/
16. Derivative Instruments

We adopted FAS No. 161 on January 3, 2009, the first day of our 2009 fiscal year. FAS No. 161 enhances the current disclosure framework for derivative instruments and hedging activities. In this initial year of adoption, we have elected not to present earlier periods for comparative purposes.

The designation of a derivative instrument as a hedge and its ability to meet the FAS No. 133 hedge accounting criteria determine how the change in fair value of the derivative instrument will be reflected in the Condensed Consolidated Financial Statements. A derivative qualifies for hedge accounting if, at inception, the derivative is expected to be highly effective in offsetting the underlying hedged cash flows or fair value and the documentation standards of FAS No. 133 are fulfilled at the time we enter into the derivative contract. A hedge is designated as a cash flow hedge, fair value hedge, or a net investment in foreign operations hedge based on the exposure being hedged. The asset or liability value of the derivative will change in tandem with its fair value. Changes in fair value, for the effective portion of qualifying hedges, are recorded in other comprehensive income (“OCI”). The derivative’s gain or loss is released from OCI to match the timing of the underlying hedged cash flows effect on earnings.

We review the effectiveness of our hedging instruments on a quarterly basis, recognize current period hedge ineffectiveness immediately in earnings, and discontinue hedge accounting for any hedge that we no longer consider to be highly effective. We recognize changes in fair value for derivatives not designated as hedges or those not qualifying for hedge accounting in current period earnings. Upon termination of cash flow hedges, we release gains and losses from OCI based on the timing of the underlying cash flows, unless the termination results from the failure of the intended transaction to occur in the expected timeframe. Such untimely transactions require us to immediately recognize in earnings gains and losses previously recorded in OCI.

Changes in interest rates, foreign exchange rates, and equity securities expose us to market risk. We manage our exposure to these risks by monitoring available financing alternatives, as well as through development and application of credit granting policies. We also use derivative instruments, including cash flow hedges, net investment in foreign operations hedges, fair value hedges, and other derivative instruments, as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. As a matter of policy, we only enter into transactions that we believe will be highly effective at offsetting the underlying risk, and we do not use derivatives for trading or speculative purposes.

Our use of derivative instruments to manage market risks exposes us to the risk that a counterparty could default on a derivative contract. Our financial instrument counterparties are high-quality investment or commercial banks with significant experience with such instruments. We manage our exposure to counterparty risk by requiring specific minimum credit standards for our counterparties and by spreading our derivative contracts among diverse counterparties. As of September 11, 2009, we had derivative contracts outstanding with seven investment grade counterparties.

 

In the event that we were to default under a derivative contract or similar obligation, our derivative counterparty would generally have the right, but not the obligation, to require immediate settlement of some or all open derivative contracts at their then-current fair value. Although the netting terms of our derivative contracts vary by agreement, in a settlement following a default, the liability positions under some of these contracts would be netted against the asset positions with the same counterparty. At September 11, 2009, we had open derivative contracts in a liability or net liability position with a total fair value of $10 million.

During the first three quarters of 2009, we used the following derivative instruments to mitigate our interest rate and foreign currency exchange rate risks:

Cash Flow Hedges

During 2008, we entered into interest rate swaps to manage interest rate risk associated with forecasted timeshare note sales. During 2008, eleven swaps were designated as cash flow hedges under FAS No. 133. We terminated nine of the eleven swaps in 2008 and recognized a $6 million loss in “Timeshare sales and services” revenue in our 2008 full-year income statement. The remaining two swaps became ineffective in the fourth quarter of 2008. We recognized a $12 million loss in “Timeshare sales and services” revenue in our full-year 2008 income statement and no longer accounted for them as cash flow hedges under FAS No. 133. We terminated these swaps in the first quarter of 2009 and recognized no additional gain or loss.

During 2009 and fiscal years 2008 and 2007, we entered into forward foreign exchange contracts to hedge the risk associated with forecasted transactions for contracts and fees denominated in foreign currencies. These contracts have terms of less than three years. During the 2009 third quarter, we entered into foreign exchange option contracts to hedge the risk associated with forecasted transactions for contracts and fees denominated in foreign currencies. These contracts have terms of less than one year.

Net Investment Hedges

During 2009, we entered into forward foreign exchange contracts to manage our risk of currency exchange rate volatility associated with certain of our investments in foreign operations. The contracts offset the gains and losses associated with translation adjustments for various investments in foreign operations.

Fair Value Hedges

In 2003, we entered into an interest rate swap to address interest rate risk. Under this agreement, which has an aggregate notional amount of $92 million and matures in 2010, we receive a floating rate of interest and pay a fixed rate of interest. The swap modifies our interest rate exposure by effectively converting a note receivable with a fixed rate to a floating rate. We classify this swap as a fair value hedge under FAS No. 133 and we recognize the change in the fair value of the swap, as well as the change in the fair value of the underlying note receivable, in interest income. Due to the structure of the swap, the change in its fair value moves in tandem with the change in fair value of the underlying note receivable. The hedge is highly effective and, therefore, we reported no net gain or loss during the first three quarters of 2009.

Derivatives not Designated as Hedging Instruments Under FAS No. 133

In certain note sale transactions, we use interest rate swaps to limit the variability in the value of the excess spread (or the difference between the loan portfolio average fixed coupon rate and the variable rate expected by the note investors) due to changing interest rates. Although we expect to receive the excess spread, we provide interest rate swaps for the benefit of the investors in the event the underlying notes do not perform as expected. The interest rate swaps used in some conduit note sale transactions move inversely to the movement in the excess spread and thus provide a natural hedge in the transaction. We use multiple interest rate swaps, including differential swaps, in some of the term asset backed securities transactions that largely offset one another to the extent that the sold notes prepay within expectations. Given the natural hedges provided by both of these types of transactions, we did not apply FAS No. 133 hedge accounting to these interest rate swaps. In certain deals, we sell a portfolio of fixed-coupon consumer loans to investors who require a variable rate of return. If unhedged, an increase in the variable rate of those deals would compress the excess spread; therefore, we enter into these interest rate swaps to preserve the excess spread at the level expected by the investors.

At the end of the 2009 third quarter, we had six such swap agreements with expiration dates ranging from 2013 to 2022. Due to market conditions, we were required to enter into a differential swap, representing two of our six outstanding swaps, related to our retained interests for our 2009 first quarter note sale.

We do not apply the standards of FAS No. 133 to some of our foreign exchange contracts because there is no material timing difference between the recognition of the gain or loss on the underlying asset or liability and the gain or loss on the derivative instrument. During the first three quarters of 2009 and for fiscal year 2008, we entered into these forward contracts to hedge foreign currency denominated net monetary assets and/or liabilities. We anticipate entering into similar contracts when these contracts expire in the fourth quarter of 2009. Examples of monetary assets and liabilities that we hedge include, but are not limited to, cash, receivables, payables, and debt. Pursuant to FAS No. 52, “Foreign Currency Translation,” the gains or losses on such forward contracts are computed by multiplying the foreign currency amount of the forward contract by the difference between the spot rate at the balance sheet date and the spot rate at the date of inception of the forward contract (or the spot rate last used to measure a gain or loss on that contract for an earlier period).

The following tables summarize the fair value of our derivative instruments, and the effect of derivative instruments on our Condensed Consolidated Statements of Income and “Comprehensive income.”

Fair Value of Derivative Instruments

 

($ in millions)    Balance Sheet Location    Fair Value at
September 11, 2009
    Notional Amount at
September 11, 2009

Derivatives designated as hedging instruments under FAS No. 133 (1)

       

Asset Derivatives

       

Foreign exchange forwards (2)

   Other payables and accruals    $ —        $ 3

Liability Derivatives

       

Interest rate swaps

   Other long-term liabilities      (4     92

Foreign exchange forwards (2)

   Other payables and accruals      (3     44

Net investment hedges

   Other payables and accruals      —          16
             

Total liabilities under FAS No. 133

      $ (7  
             

Derivatives not designated as hedging instruments under FAS No. 133 (1)

       

Asset Derivatives

       

Interest rate swaps (2)

   Other long-term liabilities    $ 4      $ 198

Foreign exchange forwards (2)

   Other payables and accruals      —          23
             

Total asset derivatives not under FAS No. 133

      $ 4     
             

Liability Derivatives

       

Interest rate swaps (2)

   Other long-term liabilities    $ (6   $ 265

Foreign exchange forwards (2)

   Other payables and accruals      (1     261
             

Total liability derivatives not under FAS No. 133

      $ (7  
             

 

(1)

See Footnote No. 6, “Fair Value Measurements,” for additional information on the fair value of our derivative instruments.

 

(2)

Certain derivatives are subject to master netting agreements in accordance with FASB Interpretation No. 39.

 

The Effect of Derivative Instruments on the Condensed Consolidated Statement of Income

 

($ in millions)    Location of Gain (Loss)
Recognized in Income
   Gain (Loss) Recognized in Income  
          Twelve Weeks
Ended

September 11, 2009
    Thirty-Six
Weeks Ended
September 11, 2009
 

FAS No. 133 cash flow hedges

       

Foreign exchange forwards

   Base management fees    $ 2      $ 5   

Foreign exchange forwards

   Franchise fees      —          1   
                   

Total gain from FAS No. 133 cash flow hedges

        2        6   
                   

Derivatives not designated as hedging instruments under FAS No. 133

       

Interest rate swaps

   Timeshare sales and services    $ (1   $ —     

Foreign exchange forwards

   General, administrative, and other      (4     (12
                   

Total (loss) from derivatives not under FAS No. 133

        (5     (12
                   

Total (loss) recognized in income

      $ (3   $ (6
                   

The Effect of Derivative Instruments on the Statement of Comprehensive Income (1), (2)

 

($ in millions)    FAS No. 133
Cash Flow
Hedges Foreign
Exchange
Forwards
     FAS No. 133
Net
Investment
Foreign
Exchange
Forwards
 

Deferred gains (losses) from derivatives in OCI at January 3, 2009

   $ 6       $ 1   

Gains (losses) recognized in OCI from derivatives

     3         1   

Gains (losses) reclassified from OCI (effective portion) to:

     

Base management fees

     (1      —     

Franchise fees

     (1      —     
                 

Deferred gains (losses) from derivatives in OCI at March 27, 2009

     7         2   

Gains (losses) recognized in OCI from derivatives

     (3      (1

Gains (losses) reclassified from OCI (effective portion) to:

     

Base management fees

     (2      —     

Franchise fees

     —           —     
                 

Deferred gains (losses) from derivatives in OCI at June 19, 2009

     2         1   

Gains (losses) recognized in OCI from derivatives

     —           (1

Gains (losses) reclassified from OCI (effective portion) to:

     

Base management fees

     (2      —     
                 

Deferred gains (losses) from derivatives in OCI at September 11, 2009

   $ —         $ —     
                 

Forecasted reclassification of derivative gains (losses) from OCI in the next 12 months

     

Base management fees

   $ —         $ —     
                 

Total forecasted recognition of derivative gains (losses)

   $ —         $ —     
                 

 

  (1)

For additional information, see Footnote No. 14, “Comprehensive Income and Capital Structure.”

 

  (2)

There was no ineffective portion of our derivatives in the first three quarters of 2009; therefore, no amount required reclassification from OCI due to ineffectiveness.

 

5 MICROCHIP TECHNOLOGY INC
(12)           Derivative Instruments
 
The Company has international operations an