ING Direct 2004 Annual Report Download - page 100

98 ING Group Annual Report 2004
Numerical information about derivatives activities The following tables give numerical information about the derivatives
activities, detailing types of derivatives, credit risks, counterparties and use of the derivatives transactions.
The first table illustrates the relative importance of the various types of derivative products, showing the notional amounts at
year-end 2004 and year-end 2003. Notional amounts represent units of account which, in respect of derivatives, reflect the
relationship with the underlying assets (bonds, for example, in the case of interest-rate futures). What they do not reflect,
however, is the credit risk assumed by entering into derivatives transactions.
Listed derivatives are standardised and include futures and certain option contracts. Over-the-counter derivatives contracts are
individually negotiated between contracting parties and include forward contracts, options and swaps.
Forward contracts are commitments to exchange currencies or to buy or sell other financial instruments at specified future
dates. Futures contracts are similar to forwards. However, major exchanges act as intermediaries and require daily cash
settlement and collateral deposits.
Option contracts give the purchaser, for a premium, the right, but not the obligation, to buy or sell within a limited period of
time a financial instrument or currency at a contracted price that may also be settled in cash. Written options give the issuer the
obligation to buy or sell within a limited period of time a financial instrument or currency at a contracted price that may also be
settled in cash. This subjects ING Group to market risk, but not to credit risk, since the counterparties have already performed in
accordance with the terms of the contract by paying a cash premium up front.
Swap contracts are commitments to settle in cash at a specified future date, based on differentials between specified financial
indices as applied to a notional amount. Generally, no cash is exchanged at the outset of the contract and no principal
payments are made by either party.
The year-end positive fair value represents the maximum loss that ING Group would incur on its derivatives transactions if all its
counterparties at year end defaulted. This fair value can and will fluctuate from day to day due to changes in the value of the
underlying assets. In order to arrive at an estimate of credit risk at any given time, a margin is added to the fair value figures to
arrive, in accordance with internationally accepted criteria, at what is called the unweighted credit equivalents.
The weighted credit equivalents are the unweighted credit equivalents multiplied by the weighting factors determined in
accordance with standards of the international supervisory authorities. Under certain conditions, the credit risk can be reduced
by entering into bilateral netting agreements. In the case of non-observance of the obligation by the counterparty, this kind of
agreement gives the right to net off receivables and payables in respect of open derivatives contracts. The effect of reducing
the risk by means of bilateral netting agreements is shown at the bottom of the first table.
ADDITIONAL INFORMATION RELATING TO
THE CONSOLIDATED BALANCE SHEET OF ING GROUP
(continued)
2.1
ANNUAL ACCOUNTS