HSBC 2006 Annual Report Download - page 356

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 17
354
Contract amounts of derivatives held for trading purposes by product type
HSBC HSBC Holdings
2006 2005 2006 2005
US$m US$m US$m US$m
Foreign exchange .......................................................... 2,182,005 1,721,456 9,869 10,224
Interest rate ................................................................... 9,843,601 6,731,721 5,304 5,304
Equities ......................................................................... 207,016 101,364 – –
Credit derivatives .......................................................... 1,109,828 511,741 – –
Commodity and other .................................................... 30,532 38,458 – –
13,372,982 9,104,740 15,173 15,528
Derivatives valued using models with unobservable inputs
The amount that has yet to be recognised in the consolidated income statement relating to the difference between the
fair value at initial recognition (the transaction price) and the amount that would have arisen had valuation techniques
used for subsequent measurement been applied at initial recognition, less subsequent releases, is as follows:
2006 2005
US$m US$m
Unamortised balance at 1 January ..................................................................................................... 252 73
Deferral on new transactions ............................................................................................................. 283 340
Recognised in the income statement during the period:
– amortisation ................................................................................................................................ (59) (56)
– subsequent to unobservable inputs becoming observable ......................................................... (226) (64)
– maturity or termination ............................................................................................................... (53) (25)
Exchange differences ......................................................................................................................... 17 (16)
Unamortised balance at 31 December ............................................................................................... 214 252
Hedging instruments
HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and
liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing
debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the
maturity and other profiles of its assets and liabilities.
The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and the type
of hedge transactions. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash
flow hedges, or investment hedges. These are described under the relevant headings below:
Contract amounts of derivatives held for hedging purposes by product type
At 31 December 2006 At 31 December 2005
Cash flow
hedge
Fair value
hedge
Cash flow
hedge
Fair value
hedge
US$m US$m US$m US$m
Foreign exchange .......................................................... 21,765 2,985 16,940 2,699
Interest rate ................................................................... 201,635 24,279 174,875 19,745
Equities .......................................................................... – 30 – –
223,400 27,294 191,815 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.