HSBC 2005 Annual Report Download - page 290

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
288
Contract amounts of derivatives held for hedging purposes by product type
At 31 December 2005
Cash flow
hedge
Fair value
hedge
US$m US$m
Foreign exchange ........................................................................................................................... 16,940 2,699
Interest rate ..................................................................................................................................... 174,875 19,745
191,815 22,444
With respect to exchange rate and interest rate contracts, the notional or contractual amounts of these instruments
indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at
risk.
Fair value hedges
HSBC’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair
value of fixed-rate long-term financial instruments due to movements in market interest rates. For qualifying fair
value hedges, all changes in the fair value of the derivative and in the fair value of the item in relation to the risk
being hedged are recognised in income. If the hedge relationship is terminated, the fair value adjustment to the
hedged item continues to be reported as part of the basis of the item and is amortised to income as a yield adjustment
over the remainder of the hedging period.
The fair values of outstanding derivatives designated as fair value hedges at 31 December 2005 were assets of
US$149 million and liabilities of US$471 million.
Gains or losses arising from fair value hedges
2005
US$m
Gains/(losses):
– on hedging instruments ........................................................................................................................................... 81
– on the hedged items attributable to the hedged risk ................................................................................................ (67)
14
Cash flow hedges
HSBC is exposed to variability in future interest cash flows on non-trading assets and liabilities which bear interest at
variable rates or which are expected to be re-funded or reinvested in the future. The amounts and timing of future
cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and
liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and
defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for
identifying gains and losses on the effective portions of derivatives designated as cash flow hedges of forecast
transactions. Gains and losses are initially recognised directly in equity, in the cash flow hedging reserve, and are
transferred to the income statement when the forecast cash flows affect the income statement.
At 31 December 2005, the fair values of outstanding derivatives designated as cash flow hedges of forecast
transactions were assets of US$3,528 million and liabilities of US$1,062 million.
The schedule of forecast principal balances on which the expected interest cash flows arise as at 31 December 2005
is as follows:
At 31 December 2005
3 months
or less
More than 3
months but less
than 1 year
5 years or less
but more than
1 year
More than
5 years
US$m US$m US$m US$m
Cash inflows from assets ............................................. 91,703 68,985 54,205 3,108
Cash outflows from liabilities ...................................... (44,957) (32,485) (24,955) (165)
Net cash inflows .......................................................... 46,746 36,500 29,250 2,943