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34.Derivativenancialinstrumentscontinued
Thefollowingtableshowsthechangesduringtheyearinthenetfairvalueofembeddedderivatives,withinlevel3ofthefairvaluehierarchy.
$million
2010 2009
Commodity Commodity
price price
Netfairvalueofcontractsat1January (1,331) (1,892)
Settlements 37 221
Gains(losses)recognizedintheincomestatementa(350) 535
Exchangeadjustments 37 (195)
Netfairvalueofcontractsat31December (1,607) (1,331)
aTheamountforgains(losses)recognizedintheincomestatementfor2009includesalossof$224millionarisingasaresultofrenementsinthemodellingandvaluationmethodsusedforthesecontracts.
Theamountrecognizedintheincomestatementfortheyearrelatingtolevel3embeddedderivativesstillheldat31December2010wasa$350million
loss(2009$347milliongainrelatingtoembeddedderivativesstillheldat31December2009).
Thefairvaluegain(loss)onembeddedderivativesisshownbelow.
$million
2010 2009 2008
Commoditypriceembeddedderivatives (309) 607 (106)
Interestrateembeddedderivatives – – (5)
Fairvalue(loss)gain (309) 607 (111)
Cash ow hedges
At31December2010,thegroupheldcurrencyforwardsandfuturescontractsandcylindersthatwerebeingusedtohedgetheforeigncurrencyriskof
highlyprobableforecasttransactions,aswellascross-currencyinterestrateswapstoxtheUSdollarinterestrateandUSdollarredemptionvalue,
withmatchingcriticaltermsonthecurrencylegoftheswapwiththeunderlyingnon-USdollardebtissuance.Note27outlinesthemanagementofrisk
aspectsforcurrencyandinterestraterisk.Forcashowhedgesthegrouponlyclaimshedgeaccountingfortheintrinsicvalueonthecurrencywithany
fairvalueattributabletotimevaluetakenimmediatelytotheincomestatement.Therewerenohighlyprobabletransactionsforwhichhedgeaccounting
hasbeenclaimedthathavenotoccurredandnosignicantelementofhedgeineffectivenessrequiringrecognitionintheincomestatement.Forcash
owhedgesthepre-taxamountremovedfromequityduringtheperiodandincludedintheincomestatementisagainof$25million(2009lossof
$366millionand2008lossof$45million).Theentiregainof$25millionisincludedinproductionandmanufacturingexpenses(2009$332millionlossin
productionandmanufacturingexpenseand$34millionlossinnancecosts;2008$1millionlossinproductionandmanufacturingexpenseand
$44millionlossinnancecosts).Theamountremovedfromequityduringtheperiodandincludedinthecarryingamountofnon-nancialassetswasa
lossof$53million(2009$136millionlossand2008$38milliongain).
Theamountsretainedinequityat31December2010areexpectedtomatureandimpacttheincomestatementbyagainof$89millionin2011,a
lossof$23millionin2012andalossof$50millionin2013andbeyond.
Fair value hedges
At31December2010,thegroupheldinterestrateandcross-currencyinterestrateswapcontractsasfairvaluehedgesoftheinterestrateriskonxed
ratedebtissuedbythegroup.Theeffectivenessofeachhedgerelationshipisquantitativelyassessedanddemonstratedtocontinuetobehighlyeffective.
Thegainonthehedgingderivativeinstrumentstakentotheincomestatementin2010was$563million(2009$98millionlossand2008$2milliongain)
offsetbyalossonthefairvalueofthenancedebtof$554million(2009$117milliongainand2008$20millionloss).
Theinterestrateandcross-currencyinterestrateswapshaveanaveragematurityoffourtoveyears,(2009fourtoveyears)andareusedto
convertsterling,euro,Swissfranc,Australiandollar,JapaneseyenandHongKongdollardenominatedborrowingsintoUSdollaroatingratedebt.
Note27outlinesthegroup’sapproachtointerestrateriskmanagement.
Hedges of net investments in foreign operations
Thegroupheldcurrencyswapcontractsasahedgeofalong-terminvestmentinaUKsubsidiarythatexpiredin2009.Thelossonthehedgerecognizedin
equityin2008was$38million.USdollarshadbeensoldforwardforsterlingpurchasedandmatchedtheunderlyingliabilitywithnosignicant
ineffectivenessreectedintheincomestatement.
196BPAnnualReportandForm20-F2010