RBS 2005 Annual Report Download - page 168

166
Notes on the accounts
Notes on the accounts continued
Group
Total derivatives
Notional amounts Assets Liabilities
2005 £bn £m £m
Exchange rate contracts
Spot, forwards and futures 885 10,758 10,214
Currency swaps 221 3,228 3,849
Options purchased 301 6,438 —
Options written 315 — 6,101
Interest rate contracts
Interest rate swaps 7,234 65,618 67,156
Options purchased 814 5,988 —
Options written 719 — 5.557
Futures and forwards 1,482 268 325
Credit derivatives 217 1,455 1,355
Equity and commodity contracts 61 1,910 1,881
95,663 96,438
Included in the above are cash flow hedging derivatives as follows:
Spot, forwards and futures 525
Interest rate swaps 431 373
Included in the above are fair value hedging derivatives as follows:
Interest rate swaps 1,096 676
The company held derivative assets at fair value amounting to £55 million (notional amounts £1 billion).
Companies in the Group enter into various off-balance sheet
financial instruments (derivatives) as principal either as a
trading activity or to manage balance sheet foreign exchange
and interest rate risk. Derivatives include swaps, forwards,
futures and options. They may be traded on an organised
exchange (exchange-traded) or over-the-counter (OTC).
Holders of exchange traded derivatives are generally required
to provide margin daily in the form of cash or other collateral.
Swaps include currency swaps, interest rate swaps, credit
default swaps, total return swaps and equity and equity index
swaps. A swap is an agreement to exchange cash flows in the
future in accordance with a pre-arranged formula. In currency
swap transactions, interest payment obligations are exchanged
on assets and liabilities denominated in different currencies;
the exchange of principal may be notional or actual. Interest
rate swap contracts generally involve exchange of fixed and
floating interest payment obligations without the exchange of
the underlying principal amounts.
Forwards include forward foreign exchange contracts and
forward rate agreements. A forward contract is a contract to
buy (or sell) a specified amount of a physical or financial
commodity, at agreed price, on an agreed future date.
Forward foreign exchange contracts are contracts for the
delayed delivery of currency on a specified future date.
Forward rate agreements are contracts under which two
counterparties agree on the interest to be paid on a notional
deposit of a specified maturity at a specific future date; there
is no exchange of principal.
Futures are exchange-traded forward contracts to buy (or sell)
standardised amounts of underlying physical or financial
commodities. The Group buys and sells currency, interest rate
and equity futures.
Options include exchange-traded options on currencies,
interest rates and equities and equity indices and OTC
currency and equity options, interest rate caps and floors and
swaptions. They are contracts that give the holder the right but
not the obligation to buy (or sell) a specified amount of the
underlying physical or financial commodity at an agreed price
on an agreed date or over an agreed period.
The Group enters into fair value and cash flow hedges and
hedges of net investments in foreign operations. Fair value
hedges principally involve interest rate swaps hedging the
interest rate risk in recognised financial assets and financial
liabilities. Similarly the majority of the Group’s cash flow
hedges relate to exposure to variability in future interest
payments and receipts on forecast transactions and on
recognised financial assets and financial liabilities and hedged
by interest rate swaps for periods of up to 28 years. The Group
hedges its net investments in foreign operations with currency
borrowings.
19 Derivatives at fair value