HSBC 2010 Annual Report Download - page 327

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Overview Operating & Financial Review Governance Financial Statements Shareholder Information
The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and the type
of hedge transactions. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash
flow hedges, or hedges in net investment of foreign operations. These are described under the relevant headings
below.
The notional contract amounts of derivatives held for hedging purposes indicate the nominal value of transactions
outstanding at the balance sheet date; they do not represent amounts at risk.
Notional contract amounts of derivatives held for hedging purposes by product type
At 31 December 2010 At 31 December 2009
Cash flow
hedge
Fair value
hedge
Cash flow
hedge
Fair value
hedge
US$m US$m US$m US$m
Foreign exchange .......................................................................... 10,599 1,392 12,359 2,469
Interest rate ................................................................................... 282,412 62,757 236,388 42,224
293,011 64,149 248,747 44,693
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 2010 At 31 December 2009
Assets Liabilities Assets Liabilities
US$m US$m US$m US$m
Foreign exchange .......................................................................... 153 – 342 –
Interest rate ................................................................................... 443 2,226 242 1,085
596 2,226 584 1,085
Gains or losses arising from fair value hedges
2010
2009 2008
US$m US$m US$m
Gains/(losses):
– on hedging instruments .......................................................................................... (830) 114 (296)
– on the hedged items attributable to the hedged risk ............................................... 868 (159) 301
38 (45) 5
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.