Citigroup Inc.

Fair Value HedgesHedging of benchmark interest rate riskCitigroup hedges exposure to changes in the fair value of outstanding fixedrateissued debt and certificates of deposit. The fixed cash flows from thosefinancing transactions are converted to benchmark variable-rate cash flowsby entering into receive-fixed, pay-variable interest rate swaps. Some of thesefair value hedge relationships use dollar-offset ratio analysis to determinewhether the hedging relationships are highly effective at inception and on anongoing basis, while others use regression.Citigroup also hedges exposure to changes in the fair value of fixed-rateassets, including available-for-sale debt securities and loans. The hedginginstruments used are receive-variable, pay-fixed interest rate swaps. Someof these fair value hedging relationships use dollar-offset ratio analysis todetermine whether the hedging relationships are highly effective at inceptionand on an ongoing basis, while others use regression analysis.Hedging of foreign exchange riskCitigroup hedges the change in fair value attributable to foreign-exchangerate movements in available-for-sale securities that are denominated incurrencies other than the functional currency of the entity holding thesecurities, which may be within or outside the U.S. The hedging instrumentemployed is a forward foreign-exchange contract. In this type of hedge, thechange in fair value of the hedged available-for-sale security attributableto the portion of foreign exchange risk hedged is reported in earnings andnot Accumulated other comprehensive income—a process that servesto offset substantially the change in fair value of the forward contract thatis also reflected in earnings. Citigroup considers the premium associatedwith forward contracts (differential between spot and contractual forwardrates) as the cost of hedging; this is excluded from the assessment of hedgeeffectiveness and reflected directly in earnings. The dollar-offset method isused to assess hedge effectiveness. Since that assessment is based on changesin fair value attributable to changes in spot rates on both the available-forsalesecurities and the forward contracts for the portion of the relationshiphedged, the amount of hedge ineffectiveness is not significant.The following table summarizes the gains (losses) on the Company’s fairvalue hedges for the years ended December 31, 2010 and December 31, 2009:Gains (losses) onfair value hedges (1)In millions of dollars 2010 2009Gain (loss) on the derivatives in designatedand qualifying fair value hedgesInterest rate contracts $ 948 $(4,228)Foreign exchange contracts 729 863Total gain (loss) on the derivatives in designatedand qualifying fair value hedges $ 1,677 $(3,365)Gain (loss) on the hedged item in designatedand qualifying fair value hedgesInterest rate hedges $ (945) $ 4,065Foreign exchange hedges (579) (373)Total gain (loss) on the hedged item indesignated and qualifying fair value hedges $(1,524) $ 3,692Hedge ineffectiveness recognized inearnings on designated and qualifyingfair value hedgesInterest rate hedges $ (23) $ (179)Foreign exchange hedges 10 138Total hedge ineffectiveness recognized inearnings on designated and qualifyingfair value hedges $ (13) $ (41)Net gain (loss) excluded from assessmentof the effectiveness of fair value hedgesInterest rate contracts $ 26 $ 16Foreign exchange contracts 140 352Total net gain (loss) excluded from assessmentof the effectiveness of fair value hedges $ 166 $ 368(1) Amounts are included in Other revenue on the Consolidated Statement of Income. The accrued interestincome on fair value hedges is excluded from this table.254