HSBC 2003 Annual Report Download - page 303

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(d) HSBC Holdings
HSBC Holdings’ investment in and indebtedness of and to subsidiary undertakings was as follows:
2003 20022
Bank Non-bank Total Bank Non-bank Total
US$m US$m US$m US$m US$m US$m
Investments in subsidiary undertakings1...... 54,336 26,165 80,501 50,752 6,758 57,510
Amounts owed by HSBC undertakings ....... 11,883 4,739 16,622 9,965 3,422 13,387
Subordinated liabilities to HSBC
undertakings ............................................ – 6,845 6,845 – 4,036 4,036
Other amounts owed to HSBC
undertakings ............................................ 1,603 4,576 6,179 1,311 5,151 6,462
1Investments in subsidiary undertakings have been analysed on the basis of the business of the principal operating sub-group, i.e.
banking sub-groups which include insurance companies have been categorised as banks.
2Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1.
38 Financial instruments
(a) Derivatives
Off-balance-sheet financial instruments, commonly referred to as derivatives, are contracts the characteristics of
which are derived from those of the underlying assets, interest and exchange rates, equity indices, commodity
prices or credit spreads. They include futures, forwards, swap and options transactions in the foreign exchange,
interest rate, equity, credit and commodity markets. Transactions are negotiated directly with customers, with
HSBC acting as a counterparty, or can be dealt through exchanges.
(i) Nature and terms of derivatives
The following outlines the nature and terms of the most common types of derivatives used by HSBC.
Exchange rate contracts
Forward foreign exchange contracts are agreements to buy or sell fixed amounts of currency at agreed
rates of exchange on a specified future date.
Cross currency swaps are agreements that involve the exchange of interest payments in one specified
currency for interest payments in another specified currency for a specified period, based on an underlying
amount. The agreement may additionally involve the exchange and, on maturity of the swap, re-exchange
of the principal amount.
Currency futures are typically exchange-traded agreements to buy or sell standard amounts of a specified
currency at an agreed exchange rate on a standard future date.
Currency options give the buyer on payment of a premium the right, but not the obligation, to buy or sell
specified amounts of currency at agreed rates of exchange on or before a specified future date.
Interest rate contracts
Interest rate swaps involve the exchange of interest rate obligations with a counterparty for a specified
period without exchanging the underlying (or notional) principal. HSBC may enter a swap transaction
either as an intermediary or as a direct counterparty.
Interest rate futures are typically exchange-traded agreements to buy or sell a standard amount of a
specified fixed income security or time deposit at an agreed interest rate on a standard future date.
Forward rate agreements give the buyer the ability to determine the underlying rate of interest for a
specified period commencing on a specified future date (the ‘settlement date’ ). There is no exchange of
principal and settlement is effected on the settlement date. The settlement amount is calculated by reference
to the difference between the contract rate and the market rate prevailing on the settlement date.