HSBC 2003 Annual Report Download - page 172

HSBC HOLDINGS PLC
Financial Review (continued)
170
Daily distribution of market risk revenues in 2003
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< Profit and loss frequency
Daily distribution of market risk revenues in 2002
< Profit and loss frequency
Foreign exchange exposure
HSBC’ s foreign exchange exposures comprise
trading exposures and structural foreign currency
translation exposure.
Trading exposures
Foreign exchange trading exposures comprise those
which arise from foreign exchange dealing within
Global Markets, and currency exposures originated
within HSBC’ s commercial banking businesses. The
latter exposures are transferred to local treasury units
where they are managed together with exposures
which result from dealing activities, within limits
approved by the Group Management Board. VAR on
foreign exchange trading positions is shown in
Note 40 in the ‘Notes on the Financial Statements’
on page 310.
The average one-day foreign exchange revenue
in 2003 was US$3.4 million compared with
US$3.2 million for 2002.
Structural currency exposure
HSBC’ s main operations are in the UK, the US,
Hong Kong, France, Mexico and Brazil, although it
also has operations elsewhere in Europe, the rest of
Asia-Pacific, North America and South America.
The main operating (or functional) currencies in
which HSBC’ s business is transacted are, therefore,
sterling, the US dollar, the Hong Kong dollar, the
euro, the Mexican peso and the Brazilian real.
As the US dollar and currencies linked to it form
the dominant currency bloc in which HSBC’s
operations transact business, HSBC Holdings
prepares its consolidated financial statements in US
dollars. HSBC’s consolidated balance sheet is
therefore affected by movements in exchange rates
between all other functional currencies and the US
dollar. These currency exposures, which reflect the
extent to which the Group’s capital is invested in
non-US dollar denominated capital investments in
subsidiaries, branches and associated undertakings,
are referred to as structural currency exposures.
Translation gains and losses arising from these
exposures are recognised in the statement of total
consolidated recognised gains and losses.
HSBC’s structural foreign currency exposures
are managed with the primary objective of ensuring,
where practical, that HSBC’s and individual banking
subsidiaries’ tier 1 capital ratios are protected from
the effect of changes in exchange rates. This is
usually achieved by holding qualifying tier 1 capital
broadly in proportion to the corresponding foreign-
currency-denominated risk-weighted assets at a
subsidiary bank level. HSBC considers hedging
structural foreign currency exposures only in limited
circumstances, to protect the tier 1 capital ratio or the
US dollar value of capital invested. Such hedging
would be undertaken using forward foreign exchange
contracts or by financing with borrowings in the
same currencies as the functional currencies
involved.
As subsidiaries are generally able to balance
adequately foreign currency tier 1 capital with
foreign currency risk-weighted assets, HSBC’s
foreign currency structural exposures are usually
unhedged, including exposures due to foreign-
currency-denominated profits arising during the year.
Selective hedges were in place during 2003. There
was no material effect from foreign currency
exchange rate movements on HSBC’s tier 1 capital
ratio during the period.
102
0
2
34
7
14
16
13
21
32
28 28
15
18
14
10 11
53
6
2
0
21 1
0
5
10
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20
25
30
35
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-27-25-9-7-5-3-11357911131517192123252729313335373941
Number of days
0 1 0 0 02121
5
7
32
49
66
45
24
16
5
110010
0
10
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80
-90 -85 -80 -40 -35 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 45 50 55 60 85 90
Revenues
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US$m
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Number of days
Revenues
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US$m
)