HSBC 2010 Annual Report Download - page 151

149
Overview Operating & Financial Review Governance Financial Statements Shareholder Information
Equity securities classified as available for sale
Fair value of equity securities classified as available for sale
(Audited)
2010 2009
US$bn US$bn
Private equity holdings71 .......................................................................................................................... 2.8 4.0
Funds invested for short-term cash management ..................................................................................... 0.5 0.8
Investment to facilitate ongoing business72 .............................................................................................. 1.0 1.2
Other strategic investments ...................................................................................................................... 3.7 3.1
8.0 9.1
For footnotes, see page 174.
Market risk arises on equity securities classified as
available for sale. The fair value of these securities
at 31 December 2010 was US$8.0bn (2009:
US$9.1bn).
The fair value of the constituents of equity
securities classified as available for sale can
fluctuate considerably. A 10% reduction in their
value at 31 December 2010 would have reduced our
equity by US$0.8bn (2009: US$0.9bn). For details of
the impairment incurred on available-for-sale equity
securities, see ‘Securitisation exposures and other
structured products’ on page 128.
Structural foreign exchange exposures
(Unaudited)
Structural foreign exchange exposures represent
net investments in subsidiaries, branches and
associates, the functional currencies of which are
currencies other than the US dollar. An entity’s
functional currency is the currency of the primary
economic environment in which the entity operates.
Exchange differences on structural exposures
are recognised in other comprehensive income. We
use the US dollar as our presentation currency in our
consolidated financial statements because the US
dollar and currencies linked to it form the major
currency bloc in which we transact and fund our
business. Our consolidated balance sheet is,
therefore, affected by exchange differences between
the US dollar and all the non-US dollar functional
currencies of underlying subsidiaries.
We hedge structural foreign exchange exposures
only in limited circumstances. Our structural foreign
exchange exposures are managed with the primary
objective of ensuring, where practical, that our
consolidated capital ratios and the capital ratios of
individual banking subsidiaries are largely 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.
We may also transact hedges where a currency
in which we have structural exposures is considered
to be significantly overvalued and it is possible
in practice to transact a hedge. Any 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. No forward
foreign exchange hedges were in place during 2010
in respect of our consolidated Group structural
foreign exchange position.
For details of structural foreign exchange
exposures see Note 36 on the Financial Statements.
Sensitivity of net interest income
(Unaudited)
A principal element of our management of market
risk in non-trading portfolios is monitoring the
sensitivity of projected net interest income under
varying interest rate scenarios (simulation
modelling). We aim to mitigate the effect of
prospective interest rate movements which could
reduce future net interest income, while balancing
the cost of such hedging activities on the current net
revenue stream.
For simulation modelling, our businesses use a
combination of scenarios relevant to them and their
local markets and standard scenarios which are
required throughout HSBC. The standard scenarios
are consolidated to illustrate the combined pro forma
effect on our consolidated portfolio valuations and
net interest income.
The table below sets out the effect on future
net interest income of incremental 25 basis point
parallel falls or rises in all yield curves worldwide at
the beginning of each quarter during the 12 months
from 1 January 2011.