Citigroup Inc.

Net Investment HedgesConsistent with ASC 830-20, Foreign Currency Matters—ForeignCurrency Transactions (formerly SFAS 52, Foreign CurrencyTranslation), ASC 815 allows hedging of the foreign currency risk of anet investment in a foreign operation. Citigroup uses foreign currencyforwards, options, swaps and foreign currency denominated debt instrumentsto manage the foreign exchange risk associated with Citigroup’s equityinvestments in several non-U.S. dollar functional currency foreignsubsidiaries. Citigroup records the change in the carrying amount of theseinvestments in the Foreign currency translation adjustment accountwithin Accumulated other comprehensive income (loss). Simultaneously,the effective portion of the hedge of this exposure is also recorded in theForeign currency translation adjustment account and the ineffectiveportion, if any, is immediately recorded in earnings.For derivatives used in net investment hedges, Citigroup follows theforward-rate method from FASB Derivative Implementation Group Issue H8(now ASC 815-35-35-16 through 35-26), “Foreign Currency Hedges:Measuring the Amount of Ineffectiveness in a Net Investment Hedge.”According to that method, all changes in fair value, including changesrelated to the forward-rate component of the foreign currency forwardcontracts and the time value of foreign currency options, are recorded in theforeign currency translation adjustment account within Accumulated othercomprehensive income (loss).Foreign currency translation adjustment account. For foreigncurrency denominated debt instruments that are designated as hedges ofnet investments, the translation gain or loss that is recorded in the foreigncurrency translation adjustment account is based on the spot exchangerate between the functional currency of the respective subsidiary and theU.S. dollar, which is the functional currency of Citigroup. To the extent thenotional amount of the hedging instrument exactly matches the hedgednet investment and the underlying exchange rate of the derivative hedginginstrument relates to the exchange rate between the functional currency ofthe net investment and Citigroup’s functional currency (or, in the case ofa non-derivative debt instrument, such instrument is denominated in thefunctional currency of the net investment), no ineffectiveness is recordedin earnings.The pretax loss recorded in the Foreign currency translationadjustment account within Accumulated other comprehensive income(loss), related to the effective portion of the net investment hedges, is$3.6 billion and $4.7 billion for the years ended December 31, 2010 andDecember 31, 2009, respectively.Credit DerivativesA credit derivative is a bilateral contract between a buyer and a sellerunder which the seller agrees to provide protection to the buyer against thecredit risk of a particular entity (“reference entity” or “reference credit”).Credit derivatives generally require that the seller of credit protection makepayments to the buyer upon the occurrence of predefined credit events(commonly referred to as “settlement triggers”). These settlement triggersare defined by the form of the derivative and the reference credit and aregenerally limited to the market standard of failure to pay on indebtednessand bankruptcy of the reference credit and, in a more limited range oftransactions, debt restructuring. Credit derivative transactions referring toemerging market reference credits will also typically include additionalsettlement triggers to cover the acceleration of indebtedness and the risk ofrepudiation or a payment moratorium. In certain transactions, protectionmay be provided on a portfolio of referenced credits or asset-backed securities.The seller of such protection may not be required to make payment until aspecified amount of losses has occurred with respect to the portfolio and/ormay only be required to pay for losses up to a specified amount.The Company makes markets in and trades a range of credit derivatives,both on behalf of clients as well as for its own account. Through thesecontracts, the Company either purchases or writes protection on either asingle name or a portfolio of reference credits. The Company uses creditderivatives to help mitigate credit risk in its Corporate and Consumer loanportfolios and other cash positions, to take proprietary trading positions, andto facilitate client transactions.256