HSBC 2008 Annual Report Download - page 171

169
2008 2007
US$m US$m
Recorded profit/(loss) on:
Derivatives, trading assets
and trading liabilities ......... 779 491
Financial assets and liabilities
designated at fair value ...... 109 9
The profit during the year primarily reflects
changes in the fair value of credit derivatives which
were transferred from using a valuation technique
with significant observable inputs to a valuation
technique with significant unobservable inputs. The
change in valuation technique was due to widening
credit spreads which have increased the significance
of unobservable credit spread volatilities. These
movements are offset by reductions occurring due to
write-downs of MBSs, mortgage loans acquired for
the purpose of securitisation and credit derivative
transactions executed against monoline insurers.
HSBC Holdings
The following table provides an analysis of the basis
for valuing financial assets and financial liabilities
measured at fair value in the financial statements:
Bases of valuing HSBC Holdings’ financial assets and liabilities measured at fair value
Valuation techniques
Quoted
market
price
Using
observable
inputs
With significant
unobservable
inputs
Total
US$m US$m US$m US$m
At 31 December 2008
Assets
Derivatives ................................................................ – 3,682 – 3,682
Financial investments: available for sale ................. – – 2,629 2,629
Liabilities
Financial liabilities designated at fair value ............ 16,389 – – 16,389
Derivatives ................................................................ – 1,324 – 1,324
At 31 December 2007
Assets
Derivatives ................................................................ – 2,660 – 2,660
Financial investments: available for sale ................. 346 – 2,676 3,022
Liabilities
Financial liabilities designated at fair value ............ 18,683 – – 18,683
Derivatives ................................................................ – 44 – 44
Financial investments measured using a
valuation technique with significant unobservable
inputs comprise fixed-rate trust-preferred securities
and senior notes purchased from HSBC
undertakings. The unobservable elements of the
valuation technique include the use of implied credit
spreads and simplified bond pricing assumptions.
Effect of changes in significant unobservable
assumptions to reasonably possible alternatives
As discussed above, the fair value of financial
instruments are in certain circumstances measured
using valuation models that incorporate assumptions
that are not supported by prices from observable
current market transactions in the same instrument
and are not based on observable market data. The
following table shows the sensitivity of non-
derivative financial instruments to reasonably
possible alternative assumptions.
Reflected in equity
Favourable
changes
Unfavourable
changes
US$m US$m
Financial investments
available for sale
At 31 December 2008 .... 113 (97)
At 31 December 2007 ..... 53 (52)
Assessing available-for-sale assets for
impairment
HSBC’s policy on impairment of available-for-sale
assets is described on page 350. The following is a
description of HSBC’s application of that policy.
A systematic impairment review is carried out
periodically of all available-for-sale assets, and all
available indicators are considered to determine
whether there is any objective evidence that an
impairment may have occurred, whether as the result
of a single loss event or as the combined effect of
several events.