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minimize cash flow fluctuations. We also use foreign currency swaps to economically convert certain of our dollar-
denominated senior note and subordinated debenture principal and interest obligations into yen-denominated obligations.
Foreign currency forwards and options are executed for the Aflac Japan segment in order to hedge the currency risk
on the carrying value of certain U.S. dollar-denominated investments. The maturities of these forwards and options are
typically two years or less. In forward transactions, Aflac Japan agrees with another party to buy a fixed amount of yen
and sell a corresponding amount of U.S. dollars at a specified future date. Aflac Japan also executes foreign currency
option transactions in a collar strategy, where Aflac Japan agrees with another party to simultaneously purchase a fixed
amount of U.S. dollar put options and sell U.S. dollar call options. The combination of these two actions results in no net
premium being paid (i.e. a costless or zero-cost collar). The foreign currency forwards and options are used in fair value
hedging relationships to mitigate the foreign exchange risk associated with U.S. dollar-denominated investments
supporting yen-denominated liabilities.
Foreign currency forwards and options are also used to hedge the currency risk associated with the net investment in
Aflac Japan. In these forward transactions, Aflac agrees with another party to buy a fixed amount of U.S. dollars and sell a
corresponding amount of yen at a specified future date. In the option transactions, we use a combination of foreign
currency options to protect expected future cash flows by simultaneously purchasing yen put options (options that protect
against a weakening yen) and selling yen call options (options that limit participation in a strengthening yen). The
combination of these two actions results in no net premium being paid (i.e. a costless or zero-cost collar).
The only CDS that we currently hold relates to components of an investment in a VIE and is used to assume credit
risk related to an individual security. This CDS contract entitles the consolidated VIE to receive periodic fees in exchange
for an obligation to compensate the derivative counterparties should the referenced security issuer experience a credit
event, as defined in the contract.
Interest rate swaps involve the periodic exchange of cash flows with other parties, at specified intervals, calculated
using agreed upon rates or other financial variables and notional principal amounts. Typically, at the time a swap is
entered into, the cash flow streams exchanged by the counterparties are equal in value. No cash or principal payments
are exchanged at the inception of the contract. Interest rate swaps are primarily used to convert interest receipts on
floating-rate fixed-maturity securities contracts to fixed rates. These derivatives are predominantly used to better match
cash receipts from assets with cash disbursements required to fund liabilities.
Interest rate swaptions are options on interest rate swaps. Interest rate collars are combinations of two swaption
positions and are executed in order to hedge certain U.S. dollar-denominated available-for-sale securities that are held in
the Aflac Japan segment. We use collars to protect against significant changes in the fair value associated with our U.S.
dollar-denominated available-for-sale securities due to interest rates. In order to maximize the efficiency of the collars
while minimizing cost, we set the strike price on each collar so that the premium paid for the ‘payer leg’ is offset by the
premium received for having sold the ‘receiver leg’.
Periodically, we may enter into other derivative transactions depending on general economic conditions.
Derivative Balance Sheet Classification
The tables below summarize the balance sheet classification of our derivative fair value amounts, as well as the gross
asset and liability fair value amounts, at December 31. The fair value amounts presented do not include income accruals.
The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and are
not reflective of exposure or credit risk.
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