NOTE 6 — DERIVATIVE FINANCIAL INSTRUMENTS

As part of managing economic risk and exposure to interest rate, foreign currency and, in limited instances, credit risk, CIT enters into derivative transactions in over-the-counter markets with other financial institutions. CIT does not enter into derivative financial instruments for speculative purposes. Derivative instruments transacted since emergence from bankruptcy are cash collateralized.

The Company continues to assess hedge requirements and has reestablished counterparty relationships to facilitate hedging where economically appropriate. During 2011 and 2010, the Company's portfolio was in an asset sensitive position, whereby assets re-price faster than liabilities, and interest margin increases in a rising interest rate environment. Our hedging strategies and qualifying hedges relate primarily to currency risk management of investments in foreign operations. The Company utilizes cross-currency swaps and foreign currency forward contracts to effectively convert U.S. dollar denominated debt to a foreign currency. These transactions are classified as either foreign currency net investment hedges, or foreign currency cash flow hedges, with resulting gains and losses reflected in accumulated other comprehensive income, a separate component of equity. For hedges of foreign currency net investment positions the "forward" method is applied whereby effectiveness is assessed and measured based on the amounts and currencies of the individual hedged net investments versus the notional amounts and underlying currencies of the derivative contract. For those hedging relationships where the critical terms of the entire debt instrument and the derivative are identical and the credit-worthiness of the counterparty to the hedging instrument remains sound, there is an expectation of no hedge ineffectiveness so long as those conditions continue to be met. The net interest differential is recognized on an accrual basis as an adjustment to other income or as interest expense to correspond with the hedged position.

See the Company's Form 10-K, "Note 1 – Business and Summary of Significant Accounting Policies" for further description of its derivative transaction policies.

The following table presents fair values and notional values of derivative financial instruments:

Fair and Notional Values of Derivative Financial Instruments (dollars in millions)


	June 30, 2011			December 31, 2010
Qualifying Hedges	Notional	Asset Fair	Liability	Notional	Asset Fair	Liability
Qualifying Hedges	Amount	Value	Fair Value	Amount	Value	Fair Value
Cross currency swaps	$ 429.1	$ 0	$ (26.0)	$ 414.7	$ 0.8	$ (12.1)
Foreign currency forward exchange – cash flow hedges	164.2	0	(6.1)	183.6	6.4	(1.4)
Foreign currency forward exchange – net
investment hedges	1,492.3	0.7	(104.5)	1,333.4	0.5	(61.0)
Total Qualifying Hedges	$ 2,085.6	$ 0.7	$ (136.6)	$ 1,931.7	7.7	$ (74.5)
Non-Qualifying Hedges
Cross currency swaps	$1,380.8	$ 0	$(91.2)	$1,330.3	$14.2	$ (38.4)
Interest rate swaps	916.4	1.9	(39.7)	1,046.8	4.5	(37.7)
Written options	37.0	0	0	273.8	0	0
Purchased options	931.0	1.8	0	903.0	2.7	0
Foreign currency forward exchange contracts	2,157.3	8.9	(99.7)	2,210.0	4.3	(50.2)
TRS⁽¹⁾	1,041.5	0	0	609.9	0	0
Total Non-qualifying Hedges	$ 6,464.0	$ 12.6	$ (230.6)	$ 6,373.8	$ 25.7	$ (126.3)

(1)A financing facility with Goldman Sachs International (GSI) is structured as a total return swap (TRS), under which amounts available for advances are accounted for as a derivative. Pursuant to applicable accounting guidance, only the unutilized portion of the TRS is accounted for as a derivative and recorded at its estimated fair value.

The "notional amount" of the swap of $1,041.5 million at June 30, 2011 and $609.9 million at December 31, 2010 represent the unused portion of the GSI Facility and constitute a derivative financial instrument. It is calculated as the maximum facility commitment amount, currently $2,125.0 million, less the actual adjusted qualifying borrowing base outstanding of $1,083.5 million at June 30, 2011 and $1,515.1 million at December 31, 2010. The notional amount of the derivative will increase as the adjusted qualifying borrowing base decreases due to repayment of the underlying debt to investors. If CIT funds additional ABS under the GSI Facility, the adjusted qualifying borrowing base of the total return swap will increase and the notional amount of the derivative will decrease accordingly.

Valuation of the derivative related to the GSI Facility is based on several factors using a discounted cash flow (DCF) methodology, including:

·CIT's funding costs for similar recent secured financings;

·Forecasted usage of the long-dated GSI Facility through the final maturity date in 2028; and

·Forecasted amortization, including prepayment assumptions, due to principal payments on the underlying ABS, which impacts the amount of the unutilized portion.

The following table presents the impact of derivatives on the statements of operations:

Derivative Instrument Gains and Losses (dollars in millions)


		Quarters Ended June 30,		Six Months Ended June 30,
Derivative Instruments	Gain / (Loss) Recognized	2011	2010	2011	2010
Qualifying Hedges
Foreign currency exchange rate fluctuations – cash flow hedges	Other income	$ (4.1)	$ 9.3	$ (13.7)	$ 9.3
Total Qualifying Hedges		(4.1)	9.3	(13.7)	9.3
Non Qualifying Hedges
Cross currency swaps	Other income	(4.0)	103.8	(45.0)	113.1
Interest rate swaps	Other income	(11.1)	(30.7)	(5.2)	(50.1)
Foreign currency forward exchange contracts	Other income	(15.4)	94.7	(68.8)	164.8
Total Non-qualifying Hedges		(30.5)	167.8	(119.0)	227.8
Total derivatives-income statement impact		$ (34.6)	$ 177.1	$ (132.7)	$ 237.1