HSBC 2007 Annual Report Download - page 258

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Market risk > Structural foreign exchange exposures / HSBC Holdings / Areas of special interest
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The sensitivities are illustrative only and are
based on simplified scenarios. The table shows
interest rate risk exposures arising in available-for-
sale portfolios and from cash flow hedges which
are marked-to-market through reserves. These
particular exposures form only a part of the
Group’s overall interest rate exposures. The
accounting treatment under IFRSs of the Group’s
remaining interest rate exposures, while
economically largely offsetting the exposures
shown in the above table, does not require
revaluation movements to go to reserves.
Structural foreign exchange exposures
(Unaudited)
Structural foreign exchange exposures represent net
investments in subsidiaries, branches or associated
undertakings, the functional currencies of which
are currencies other than the US dollar.
Exchange differences on structural exposures
are recorded in the consolidated statement of
recognised income and expense. The main
operating (or functional) currencies in which
HSBC’s business is transacted are the US dollar,
the Hong Kong dollar, pound sterling, the euro, the
Mexican peso, the Brazilian real and the Chinese
renminbi. 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 exchange
differences between the US dollar and all the non-
US dollar functional currencies of underlying
subsidiaries.
HSBC hedges structural foreign exchange
exposures only in limited circumstances. HSBC’s
structural foreign exchange exposures are managed
with the primary objective of ensuring, where
practical, that HSBC’s consolidated capital ratios
and the capital ratios of individual banking
subsidiaries are protected from the effect of
changes in exchange rates. This is usually achieved
by ensuring that, for each subsidiary bank, the ratio
of structural exposures in a given currency to risk-
weighted assets denominated in that currency is
broadly equal to the capital ratio of the subsidiary
in question.
Selective hedges were in place during 2006
and 2007. Hedging is undertaken using forward
foreign exchange contracts which are accounted for
under IFRSs as hedges of a net investment in a
foreign operation, or by financing with borrowings
in the same currencies as the functional currencies
involved. There was no ineffectiveness arising from
these hedges in the year ended 31 December 2007.
There was no material effect from exchange
differences on HSBC’s capital ratios during the
year.
HSBC Holdings
(Audited)
As a financial services holding company, HSBC
Holdings has limited market risk activity. Its
activities predominantly involve maintaining
sufficient capital resources to support the Group’s
diverse activities; allocating these capital resources
across the Group’s businesses; earning dividend
and interest income on its investments in the
Group’s businesses; providing dividend payments
to HSBC Holding’s equity shareholders and interest
payments to providers of debt capital; and
maintaining a supply of short-term cash resources.
It does not take proprietary trading positions.
The main market risks to which HSBC
Holdings is exposed are interest rate risk and
foreign currency risk. Exposure to these risks arises
from short-term cash balances, funding positions
held, loans to subsidiaries, investments in long-
term financial assets and financial liabilities
including debt capital issued. The objective of
HSBC Holding’s market risk management strategy
is to reduce exposure to these risks and minimise
volatility in reported income, cash flows and
distributable reserves. Market risk for HSBC
Holdings is monitored by its Structural Positions
Review Group.
Certain loans to subsidiaries of a capital nature
that are not denominated in the functional currency
of either the provider or the recipient are accounted
for as financial assets. Changes in the carrying
amount of these assets due to exchange differences
are taken directly to the income statement. These
loans, and the associated foreign exchange
exposures, are eliminated on a Group consolidated
basis.