HSBC 2009 Annual Report Download - page 174

HSBC HOLDINGS PLC
Report of the Directors: Impact of Market Turmoil (continued)
Fair values of financial instruments > Carried at fair value
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that are generally observable include foreign
exchange spot and forward rates, benchmark interest
rate curves and volatility surfaces for commonly
traded option products. Examples of inputs that may
be unobservable include volatility surfaces, in whole
or in part, for less commonly traded option products,
and correlations between market factors such as
foreign exchange rates, interest rates and equity
prices.
Loans, including leveraged loans and loans held
for securitisation
Loans held at fair value are valued from broker
quotes and/or market data consensus providers when
available. In the absence of an observable market,
the fair value is determined using valuation
techniques. These techniques include discounted
cash flow models, which incorporate assumptions
regarding an appropriate credit spread for the loan,
derived from other market instruments issued by the
same or comparable entities.
Structured notes
The fair value of structured notes valued using a
valuation technique is derived from the fair value
of the underlying debt security as described above,
and the fair value of the embedded derivative is
determined as described in the paragraph above
on derivatives.
Fair value valuation bases
The table below provides an analysis of the various
bases described above which have been deployed
for valuing financial assets and financial liabilities
measured at fair value in the consolidated financial
statements.
The movement in the balances of assets and
liabilities measured at fair value with significant
unobservable inputs was mainly attributable to a
decrease in the fair value of derivative assets, loans
held for securitisation and the disposal of securities
in other portfolios. At 31 December 2009, financial
instruments measured at fair value using a valuation
technique with significant unobservable inputs
represented 2 per cent of total assets and liabilities
measured at fair value (2008: 2 per cent).
Bases of valuing financial assets and liabilities measured at fair value
Valuation techniques
Quoted
market
price
Level 1
Using
observable
inputs
Level 2
With significant
unobservable
inputs
Level 3 Total
US$m US$m US$m US$m
At 31 December 2009
Assets
Trading assets .................................................................. 272,509 142,452 6,420 421,381
Financial assets designated at fair value ......................... 24,184 11,773 1,224 37,181
Derivatives ....................................................................... 1,961 244,472 4,453 250,886
Financial investments: available for sale ........................ 163,149 178,168 10,214 351,531
Liabilities
Trading liabilities ............................................................. 119,544 139,812 8,774 268,130
Financial liabilities designated at fair value .................... 27,553 52,032 507 80,092
Derivatives ....................................................................... 1,843 240,611 5,192 247,646
At 31 December 2008
Assets
Trading assets .................................................................. 234,399 185,369 7,561 427,329
Financial assets designated at fair value ......................... 14,590 13,483 460 28,533
Derivatives ....................................................................... 8,495 476,498 9,883 494,876
Financial investments: available for sale ........................ 103,949 173,157 9,116 286,222
Liabilities
Trading liabilities ............................................................. 105,584 135,559 6,509 247,652
Financial liabilities designated at fair value .................... 23,311 51,276 – 74,587
Derivatives ....................................................................... 9,896 473,359 3,805 487,060