HSBC 2007 Annual Report Download - page 401

399
18 Derivatives
Fair values of derivatives by product contract type held by HSBC
Assets Liabilities
Trading Hedging Total Trading Hedging Total
US$m US$m US$m US$m US$m US$m
At 31 December 2007
Foreign exchange ................................................ 52,018 3,490 55,508 50,608 371 50,979
Interest rate ......................................................... 83,982 1,759 85,741 83,374 2,013 85,387
Equities ............................................................... 20,229 1 20,230 19,458 – 19,458
Credit derivatives ................................................ 25,268 – 25,268 26,247 – 26,247
Commodity and other ......................................... 1,107 – 1,107 1,322 – 1,322
Gross total fair values ......................................... 182,604 5,250 187,854 181,009 2,384 183,393
Netting ................................................................ – –
Total .................................................................... 187,854 183,393
Assets Liabilities
Trading Hedging Total Trading Hedging Total
US$m US$m US$m US$m US$m US$m
At 31 December 2006
Foreign exchange ................................................ 30,648 2,399 33,047 28,837 394 29,231
Interest rate ......................................................... 52,664 1,551 54,215 52,927 1,287 54,214
Equities ............................................................... 10,767 – 10,767 11,647 7 11,654
Credit derivatives ................................................ 8,237 – 8,237 8,611 – 8,611
Commodity and other ......................................... 1,304 – 1,304 1,636 – 1,636
Gross total fair values ......................................... 103,620 3,950 107,570 103,658 1,688 105,346
Netting ................................................................ (3,868) (3,868)
Total .................................................................... 103,702 101,478
Fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries
Year ended 31 December
2007 2006
Trading Trading
Assets Liabilities Assets Liabilities
US$m US$m US$m US$m
Foreign exchange .......................................................... 2,381 2 1,557 –
Interest rate ................................................................... 279 42 42 177
Gross total fair values ................................................... 2,660 44 1,599 177
Derivatives are financial instruments that derive their value from the price of underlying items such as equities,
bonds, interest rates, foreign exchange, credit spreads, commodities and equity or other indices. Derivatives enable
users to increase, reduce or alter exposure to credit or market risks. HSBC makes markets in derivatives for its
customers and uses derivatives to manage its exposure to credit and market risks.
Derivatives are carried at fair value and shown in the balance sheet as separate totals of assets and liabilities. Asset
values represent the cost to HSBC of replacing all transactions with a fair value in HSBC’s favour assuming that all
HSBC’s relevant counterparties default at the same time, and that transactions can be replaced instantaneously.
Liability values represent the cost to HSBC’s counterparties of replacing all their transactions with HSBC with a fair
value in their favour if HSBC were to default. Derivative assets and liabilities on different transactions are only set
off if the transactions are with the same counterparty, a legal right of set-off exists and the cash flows are intended to
be settled on a net basis.
Use of derivatives
HSBC transacts derivatives for three primary purposes: to create risk management solutions for clients, for
proprietary trading purposes, and to manage and hedge HSBC’s own risks. Derivatives (except for derivatives which
are designated as effective hedging instruments as defined in IAS 39) are held for trading. The held for trading
classification includes two types of derivatives: those used in sales and trading activities, and those used for risk