Cross currency swap agreements are contracts to exchange two principal amounts of two currencies at the prevailing exchange rate at inception of the contract. During the life of the swap the counterparties exchange fixed or floating rate interest payments in the swapped currencies and at maturity the principal amounts are again swapped at a pre-determined rate of exchange. Cross currency swaps are used to manage the company’s exposure to foreign exchange rate fluctuations of both assets and liabilities. AEGON uses cross currency swaps to allow investments, product offerings and borrowings to be made in foreign currencies, gaining access to additional markets and sources of funding while eliminating foreign exchange risk. Cross currency swaps are recognized in the balance sheet as an adjustment to long-term liabilities and in the income statement in investment income, benefits to policyholders or miscellaneous income and expenditure - currency exchange rate differences. The amount recognized represents the currency exchange difference on the notional amount at period-end rates.  A forward foreign exchange contract is an agreement that obligates its parties to deliver certain quantities of currencies at a specified exchange rate at a specified future date. These contracts are primarily used to hedge foreign currency risk of investments. An equity swap is a swap agreement in which one party makes payments based on either a floating index or a fixed-rate, while the other party makes payments based on the return of an equity index, basket, or single stock. Equity swaps (excluding the total return swap agreement between AEGON N.V. and Vereniging AEGON) are valued at market value with changes going through the income statement. Options are contracts that give the option purchaser the right, but not the obligation, to buy or sell, at or before a specified future date, a financial instrument at a specified price. Purchased options are carried at market value, while options sold are carried at the premium received. Unrealized gains (losses) on options are recognized in equity or current liabilities. Futures contracts are carried at market value and require daily cash settlement. Changes in the market value of interest rate futures that qualify as hedges are deferred and recognized as an adjustment of the hedged item, while changes in the market value of equity futures are recognized in income. Credit derivatives are contracts between two parties that allow for transfer of credit risk from one party to another. The party transferring risk away has to pay a fee to the party that takes the risk. A commonly used credit derivative instrument is a credit default swap. A credit default swap allows the transfer of third party credit risk from one party to another. In essence, the buyer of a credit default swap is insured against third party credit losses. If the third party defaults, the party providing insurance will have to purchase the defaulted asset from the insured party. In turn, the insurer pays the insured the remaining interest on the debt and the principal. Credit derivatives are used to hedge credit exposures or to create synthetic credit exposure.  Credit derivatives have also been used to add credit risk by selling credit protection in the form of single name credit default swaps and AAA rated tranches of synthetic collateralized debt obligations. Credit derivatives are also used to synthetically replicate corporate credit exposures. This involves the purchase of high quality low risk assets and the sale of credit derivatives. The program is designed to purchase credits that are already subject to review by AEGON’s bond credit desk but may not be available under the same terms and conditions in the cash bond market. AEGON engages in both exchange-traded derivatives contracts as well as over-the-counter (OTC) derivatives transactions. Because of its OTC derivatives positions, AEGON is exposed to counterparty credit risk. Counterparty credit risk is the risk of loss from a counterparty failing to meet its obligations according to the terms of the contract. AEGON continually monitors its position and the credit ratings of the counterparties to these derivative instruments. AEGON believes the risk of loss due to nonperformance by its counterparties is low due to their high credit quality. All OTC transactions are governed by ISDA Master Agreements, which allow for netting of positions with one specific counterparty.  The following table represents aggregate notional amounts of derivatives, held in the general account portfolio. The amounts listed for interest rate contracts will not be exchanged by parties and, thus, do not reflect an exposure of the company to market movements. The amounts listed for cross currency swaps will be exchanged at amounts calculated on the basis of the notional amounts and the terms of the derivatives, which are related to interest rates, exchange rates and/or certain indices. Notional Market Book Notional Market Book amounts value value amounts value value 2003 2003 2003 2002 2002 2002 INTEREST RATE CONTRACTS Interest rate swaps 31,274 (115) 146 35,380 (762) 62 Swaptions 40 0 0 3 0 0 Caps/floors 312 14 3 587 24 6 Forward rate agreements 136 14 0 104 2 0 OTHER DERIVATIVE CONTRACTS Cross currency swaps 5,730 622 596 6,937 249 203 Forward foreign exchange contracts 3,428 78 79 1,329 57 57 Equity swaps 2,004 (346) 36 599 (341) 37 Over-the-counter options 77 41 39 81 71 71 Credit derivatives 579 2 (2) 484 (7) (4) Exchange traded options/futures 1,380 15 (1) 3,557 72 74 Synthetic GICs 30,794 0 — 32,523 6 — AEGON GROUP ANNUAL REPORT 2003 105