HSBC 2009 Annual Report Download - page 429

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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 2009 At 31 December 2008
Fair value Fair value
Assets Liabilities Assets Liabilities
US$m US$m US$m US$m
Foreign exchange ...................................................................... 342 – 265 10
Interest rate ............................................................................... 242 1,085 574 1,257
584 1,085 839 1,267
Gains or losses arising from fair value hedges
2009 2008 2007
US$m US$m US$m
Gains/(losses):
– on hedging instruments ....................................................................................... 114 (296) (186)
– on the hedged items attributable to the hedged risk ............................................ (159) 301 205
(45) 5 19
The gains and losses on ineffective portions of fair value hedges are recognised immediately in ‘Net trading income’.
Cash flow hedges
HSBC’s cash flow hedges consist principally of interest rate and cross-currency swaps that are used to protect against
exposures to variability in future interest cash flows on non-trading assets and liabilities which bear interest at
variable rates or which are expected to be re-funded or reinvested in the future. The amounts and timing of future
cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and
liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and
defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for
identifying gains and losses on the effective portions of derivatives designated as cash flow hedges of forecast
transactions. Gains and losses are initially recognised in other comprehensive income, and accumulated in the cash
flow hedging reserve, and are transferred to the income statement when the forecast cash flows affect the income
statement.
Fair value of derivatives designated as cash flow hedges
At 31 December 2009 At 31 December 2008
Fair value Fair value
Assets Liabilities Assets Liabilities
US$m US$m US$m US$m
Foreign exchange ...................................................................... 1,353 300 1,745 816
Interest rate ............................................................................... 3,264 2,189 3,907 3,178
4,617 2,489 5,652 3,994