HSBC 2008 Annual Report Download - page 403

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Notional contract amounts of derivatives held for hedging purposes by product type
The notional contract amounts of these instruments indicate the nominal value of transactions outstanding at the
balance sheet date; they do not represent amounts at risk.
At 31 December 2008 At 31 December 2007
Cash flow
hedge
Fair value
hedge
Cash flow
hedge
Fair value
hedge
US$m US$m US$m US$m
Foreign exchange .......................................................... 14,931 2,602 21,641 3,116
Interest rate ................................................................... 229,785 27,305 248,134 34,897
Equities ......................................................................... – – – 24
244,716 29,907 269,775 38,037
Fair value hedges
HSBC’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair
value of fixed-rate long-term financial instruments due to movements in market interest rates. For qualifying fair
value hedges, all changes in the fair value of the derivative and in the fair value of the item in relation to the risk
being hedged are recognised in the income statement. If the hedge relationship is terminated, the fair value
adjustment to the hedged item continues to be reported as part of the basis of the item and is amortised to the income
statement as a yield adjustment over the remainder of the hedging period.
Fair value of derivatives designated as fair value hedges
At 31 December 2008 At 31 December 2007
Fair value Fair value
Assets Liabilities Assets Liabilities
US$m US$m US$m US$m
Foreign exchange .......................................................... 265 10 163 65
Interest rate ................................................................... 574 1,257 171 338
Equities ......................................................................... – – 1 –
839 1,267 335 403
Gains or losses arising from fair value hedges
2008 2007 2006
US$m US$m US$m
Gains/(losses):
– on hedging instruments ............................................................................... (296) (186) 8
– on the hedged items attributable to the hedged risk .................................... 301 205 8
5 19 16
The gains and losses on ineffective portions of fair value hedges are recognised immediately in ‘Net trading income’.
Cash flow hedges
HSBC’s cash flow hedges consist principally of interest rate and cross-currency swaps that are used to protect against
exposures to variability in future interest cash flows on non-trading assets and liabilities which bear interest at
variable rates or which are expected to be re-funded or reinvested in the future. The amounts and timing of future
cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and
liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and
defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for
identifying gains and losses on the effective portions of derivatives designated as cash flow hedges of forecast
transactions. Gains and losses are initially recognised directly in equity, in the cash flow hedging reserve, and are
transferred to the income statement when the forecast cash flows affect the income statement.