Barclays 2011 Annual Report Download - page 223

17 Derivative financial instruments continued
Types of derivatives held
Foreign exchange derivatives
The Group’s principal exchange rate related contracts are forward foreign exchange contracts, currency swaps and currency options. Forward foreign
exchange contracts are agreements to buy or sell a specified quantity of foreign currency, usually on a specified future date at an agreed rate. A
currency swap generally involves the exchange, or notional exchange, of equivalent amounts of two currencies and a commitment to exchange interest
periodically until the principal amounts are re-exchanged on a future date.
Currency options provide the buyer with the right, but not the obligation, either to purchase or sell a fixed amount of a currency at a specified exchange
rate on or before a future date. As compensation for assuming the option risk, the option writer generally receives a premium at the start of the option
period.
Currency derivatives are primarily designated as hedges of the foreign currency risk of net investments in foreign operations.
Interest rate derivatives
The Group’s principal interest rate related contracts are interest rate swaps, forward rate agreements, basis swaps, caps, floors and swaptions. Included
in this product category are transactions that include combinations of these features. An interest rate swap is an agreement between two parties to
exchange fixed rate and floating rate interest by means of periodic payments based upon a notional principal amount and the interest rates defined in
the contract. Certain agreements combine interest rate and foreign currency swap transactions, which may or may not include the exchange of
principal amounts. A basis swap is a form of interest rate swap, in which both parties exchange interest payments based on floating rates, where the
floating rates are based upon different underlying reference indices. In a forward rate agreement, two parties agree a future settlement of the difference
between an agreed rate and a future interest rate, applied to a notional principal amount. The settlement, which generally occurs at the start of the
contract period, is the discounted present value of the payment that would otherwise be made at the end of that period.
Interest rate derivatives, designated as cash flow hedges, primarily hedge the exposure to cash flow variability from interest rates of variable rate loans
to banks and customers, variable rate debt securities held and highly probable forecast financing transactions and reinvestments.
Interest rate derivatives designated as fair value hedges primarily hedge the interest rate risk of fixed rate borrowings in issue, fixed rate loans to banks
and customers and investments in fixed rate debt securities held.
Credit derivatives
The Group’s principal credit derivative-related contracts include credit default swaps and total return swaps. A credit derivative is an arrangement
whereby the credit risk of an asset (the reference asset) is transferred to the seller of protection. A credit default swap is a contract where the protection
seller receives premium or interest-related payments in return for contracting to make payments to the protection buyer upon a defined credit event.
Credit events normally include bankruptcy, payment default on a reference asset or assets, or downgrades by a rating agency. A total return swap is an
instrument whereby the seller of protection receives the full return of the asset, including both the income and change in the capital value of the asset.
The buyer of the protection in return receives a predetermined amount.
Equity derivatives
The Group’s principal equity-related contracts are equity and stock index swaps and options (including warrants, which are equity options listed on an
exchange). An equity swap is an agreement between two parties to exchange periodic payments, based upon a notional principal amount, with one
side paying fixed or floating interest and the other side paying based on the actual return of the stock or stock index. An equity option provides the
buyer with the right, but not the obligation, either to purchase or sell a specified stock, basket of stocks or stock index at a specified price or level on or
before a specified date. The Group also enters into fund-linked derivatives, being swaps and options whose underlings include mutual funds, hedge
funds, indices and multi-asset portfolios.
Commodity derivatives
The Group’s principal commodity-related derivative contracts are swaps, options, forwards and futures. The main commodities transacted are base
metals, precious metals, oil and oil-related products, power and natural gas.
The Group’s total derivative asset and liability position as reported on the balance sheet is as follows:
Total derivatives 2011 2010
Notional
contract
amount
£m
Fair value Notional
contract
amount
£m
Fair value
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Total derivative assets/(liabilities) held for trading 43,095,991 535,306 (524,552) 48,517,204 418,586 (403,163)
Total derivative assets/(liabilities) held for risk management 243,534 3,658 (3,358) 240,353 1,733 (2,353)
Derivative assets/(liabilities) 43,339,525 538,964 (527,910) 48,757,557 420,319 (405,516)
Barclays PLC Annual Report 2011 www.barclays.com/annualreport 221
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