BP 2014 Annual Report Download - page 152

28. Derivative financial instruments – continued
Financial OTC and physical commodity options are valued using industry standard models that consider various assumptions, including quoted forward
prices for commodities, time value, volatility factors, and contractual prices for the underlying instruments, as well as other relevant economic factors.
The degree to which these inputs are observable in the forward markets determines whether the option is categorized within level 2 or level 3 of the
fair value hierarchy.
$ million
2014 2013
Fair value
asset
Fair value
liability
Fair value
asset
Fair value
liability
Derivatives held for trading
Currency derivatives 122 (902) 192 (111)
Oil price derivatives 3,133 (1,976) 810 (806)
Natural gas price derivatives 3,859 (2,518) 2,840 (2,029)
Power price derivatives 922 (404) 871 (560)
Other derivatives 389 – 475 –
8,425 (5,800) 5,188 (3,506)
Embedded derivatives
Commodity price contracts 86 (300) 1 (653)
86 (300) 1 (653)
Cash flow hedges
Currency forwards, futures and cylinders 1 (161) 129 (30)
Cross-currency interest rate swaps – (97) – (69)
1 (258) 129 (99)
Fair value hedges
Currency forwards, futures and swaps 78 (518) 340 (154)
Interest rate swaps 1,017 (12) 526 (135)
1,095 (530) 866 (289)
9,607 (6,888) 6,184 (4,547)
Of which – current 5,165 (3,689) 2,675 (2,322)
– non-current 4,442 (3,199) 3,509 (2,225)
Derivatives held for trading
The group maintains active trading positions in a variety of derivatives. The contracts may be entered into for risk management purposes, to satisfy
supply requirements or for entrepreneurial trading. Certain contracts are classified as held for trading, regardless of their original business objective,
and are recognized at fair value with changes in fair value recognized in the income statement. Trading activities are undertaken by using a range of
contract types in combination to create incremental gains by arbitraging prices between markets, locations and time periods. The net of these
exposures is monitored using market value-at-risk techniques as described in Note 27.
The following tables show further information on the fair value of derivatives and other financial instruments held for trading purposes.
Derivative assets held for trading have the following fair values and maturities.
$ million
2014
Less than
1 year 1-2 years 2-3 years 3-4 years 4-5 years
Over
5 years Total
Currency derivatives 120 – 2 – – – 122
Oil price derivatives 2,434 416 185 63 31 4 3,133
Natural gas price derivatives 1,991 644 261 202 160 601 3,859
Power price derivatives 488 203 87 50 39 55 922
Other derivatives 70 97 161 61 – – 389
5,103 1,360 696 376 230 660 8,425
$ million
2013
Less than
1 year 1-2 years 2-3 years 3-4 years 4-5 years
Over
5 years Total
Currency derivatives 143 – 21 – – 28 192
Oil price derivatives 694 78 23 13 2 – 810
Natural gas price derivatives 1,034 526 334 192 154 600 2,840
Power price derivatives 528 202 81 22 8 30 871
Other derivatives 102 – 93 147 66 67 475
2,501 806 552 374 230 725 5,188
At both 31 December 2014 and 2013 the group had contingent consideration receivable in respect of a business disposal. The sale agreement
contained an embedded derivative – the whole agreement has, consequently, been designated at fair value through profit or loss and shown within
other derivatives held for trading, and falls within level 3 of the fair value hierarchy. The valuation depends on refinery throughput and future margins.
148 BP Annual Report and Form 20-F 2014