In Note L to its 2004 financial statements, IBM includes disclosure about its derivatives as follows: The following table summarizes the net fair value of the company€™s derivative and other risk management instruments at December 31, 2004 (included in the Consolidated Statement of Financial Position).

(a) Comprises assets of $440 million and liabilities of $219 million.
(b) Comprises assets of $12 million and liabilities of $1,004 million.
(c) Comprises liabilities of $58 million.
(d) Comprises assets of $60 million and liabilities of $100 million.
(e) Represents fair value of foreign denominated debt issuances formally designated as a hedge of net investment.
Accumulated Derivative Gains or Losses
As illustrated above, the company makes extensive use of cash flow hedges, principally in the anticipated royalties and cost transactions risk management program. In connection with the company€™s cash flow hedges, it has recorded approximately $653 million of net losses in Accumulated gains and (losses) not affecting retained earnings as of December 31, 2004, net of tax, of which approximately $492 million is expected to be reclassified to net income within the next year to provide an economic offset to the impact of the underlying anticipated cash flows hedged.
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 held by the company during the period January 1, 2001 (the date of the company€™s adoption of SFAS No. 133) through December 31, 2004:

For the years ending December 31, 2004 and 2003, respectively, there were no significant gains or losses on derivative transactions or portions thereof that were either ineffective as hedges, excluded from the assessment of hedge effectiveness, or associated with an underlying exposure that did not or was not expected to occur; 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 variables 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, 2004.
3. IBM lists $2,490 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, 2004, IBM has recognized $653 million in unrealized losses associated with cash flow hedges. Of these 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 raterisk?

Risk Management Program Hedge Designation Fair Value Cash Flow Net Investment Non-Hedge/ Other (Dollars in millions) Deivatie net asset/(liability): Debt risk management Long-term investments in foreign $221 s (53) $(14) subsidiaries (net investments) (58) Anticipated royalties and cost transactions cash and foreign currency (19) Equity risk management. Total derivatives Debt 221a) (992)(b) (58)) (40)) Long-term investments in foreign subsidiaries (net investments) . (2490)) $(2.548) Total $221 $(992) $(40) (Dollars in millions, net of tax) Debit/(Credit) December 31, 200 Net losses reclassified into earnings from equity during 2002 Changes in fair value of derivatives in 2002 December 31, 200 Net losses reclassified into earnings from equity during 2003 Changes in fair value of derivatives in 2003 December 31, 200 Net losses reclassified into earnings from equity during 2004.. Changes in fair value of derivatives in 2004 December 31.2004 $(296) (713) (463) 662 $653