BP 2007 Annual Report Download - page 148

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34 Derivative financial instruments continued
The following tables show the net fair value of derivatives held for trading at 31 December analysed by maturity period and by methodology of fair
value estimation.
$ million
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2007
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Less than Over
1 year 1-2 years 2-3 years 3-4 years 4-5 years 5 years Total
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Prices actively quoted 119 3 49 2 (9) 1 165
Prices sourced from observable data or market corroboration (212) 58 (57) 82 37 – (92)
Prices based on models and other valuation methods (39) (19) (14) (18) (7) 13 (84)
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(132) 42 (22) 66 21 14 (11)
$ million
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Less than Over
1 year 1-2 years 2-3 years 3-4 years 4-5 years 5 years Total
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Prices actively quoted 191626033 – 2
Prices sourced from observable data or market corroboration 911 29 54 19 36 4 1,053
Prices based on models and other valuation methods 30 (14) (12) (6) (8) 20 10
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1,132 77 102 46 28 26 1,411
Prices actively quoted refers to the fair value of contracts valued solely using quoted prices in an active market. Prices sourced from observable data
or market corroboration refers to the fair value of contracts valued in part using active quotes and in part using observable, market-corroborated data,
for example, swaps and physical forward contracts. Prices based on models and other valuation methods refers to the fair value of a contract valued in
part using internal models due to the absence of quoted prices, including over-the-counter options. The net change in fair value of contracts based on
models and other valuation methods during the year was a loss of $94 million (2006 $117 million loss and 2005 $130 million gain).
Gains and losses relating to derivative contracts are included either within sales and other operating revenues or within purchases in the income
statement depending upon the nature of the activity and type of contract involved. The contract types treated in this way include futures, options,
swaps and certain forward sales and forward purchases contracts. Gains or losses arise on contracts entered into for risk management purposes,
optimization activity and entrepreneurial trading. They also arise on certain contracts that are for normal procurement or sales activity for the group but
that are required to be fair valued under accounting standards. Also included within sales and other operating revenues are gains and losses on
inventory held for trading purposes. The total amount relating to all of these items was a gain of $376 million (2006 $2,842 million gain and 2005
$838 million gain).
Embedded derivatives
Prior to the development of an active gas trading market, UK gas contracts were priced using a basket of available price indices, primarily relating to oil
products. After the development of an active UK gas market, certain contracts were entered into or renegotiated using pricing formulae not directly
related to gas prices, for example, oil product and power prices. In these circumstances, pricing formulae have been determined to be derivatives,
embedded within the overall contractual arrangements that are not clearly and closely related to the underlying commodity. The resulting fair value
relating to these contracts is recognized on the balance sheet with gains or losses recognized in the income statement.
These contracts are valued using models with inputs that include price curves for each of the different products that are built up from active market
pricing data and extrapolated to the expiry of the contracts in 2018 using the maximum available external pricing information. Additionally, where
limited data exists for certain products, prices are interpolated using historic and long-term pricing relationships. Price volatility data is also an input for
the models.
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