Barclays 2015 Annual Report Download - page 285

home.barclays/annualreport Barclays PLC Annual Report 2015 I 283
18 Fair value of assets and liabilities continued
Foreign exchange derivatives
Description: These are derivatives linked to the foreign exchange (FX) market. This category includes FX forward contracts, FX swaps and FX options.
The vast majority are traded as OTC derivatives.
Valuation: Exotic and non-exotic derivatives are valued using industry standard and bespoke models. Input parameters include FX rates, interest
rates, FX volatilities, interest rate volatilities, FX interest rate correlations and others as appropriate. Unobservable model inputs are set by referencing
liquid market instruments and applying extrapolation techniques to match the appropriate risk profile.
Observability: Certain correlations, long dated forwards and volatilities are unobservable beyond liquid maturities.
Level 3 sensitivity: Sensitivity relating to unobservable valuation inputs is primarily based on the dispersion of consensus data services.
Credit derivatives
Description: These are derivatives linked to the credit spread of a referenced entity, index or basket of referenced entities or a pool of referenced
assets via securitisation. This category includes single name and index CDS, asset backed CDS, synthetic CDOs, and Nth-to-default basket swaps.
Valuation: CDS are valued using a market standard model that incorporates the credit curve as its principal input. Credit spreads are observed
directly from broker data, third party vendors or priced to proxies. Where credit spreads are unobservable, they are determined with reference to
recent transactions or proxied from bond spreads on observable trades of the same issuer or other similar entities. Synthetic CDOs are valued using
a model that calculates fair value based on credit spreads, recovery rates, correlations and interest rates, and is calibrated to the index tranche
market.
Observability: CDS contracts referencing entities that are not actively traded are considered unobservable. The correlation input to synthetic CDO
valuation is considered unobservable as it is proxied from the observable index tranche market. Where an asset backed credit derivative does not
have an observable market price and the valuation is determined using a model, the instrument is considered unobservable.
Level 3 sensitivity: The sensitivity of valuations of the illiquid CDS portfolio is determined by applying a shift to each spread curve. The shift is based
on the average range of pricing observed in the market for similar CDS. Synthetic CDO sensitivity is calculated using correlation levels derived from
the range of contributors to a consensus bespoke service.
Derivative exposure to monoline insurers
Description: These products are derivatives through which credit protection has been purchased on structured debt instruments (primarily CLOs)
from monoline insurers.
Valuation: Given the bespoke nature of the CDS, the primary valuation input is the price of the cash instrument it protects.
Observability: While the market value of the cash instrument underlying the CDS contract may be observable, its use in the valuation of CDS is
considered unobservable due to the bespoke nature of the monoline CDS contracts.
Level 3 sensitivity: Due to the high degree of uncertainty, the sensitivity reflects the impact of writing down the credit protection element of fair value
to zero.
Equity derivatives
Description: These are derivatives linked to equity indices and single names. This category includes exchange traded and OTC equity derivatives
including vanilla and exotic options.
Valuation: The valuations of OTC equity derivatives are determined using industry standard models. Input parameters include stock prices, dividends,
volatilities, interest rates, equity repo curves and, for multi-asset products, correlations. Unobservable model inputs are determined by reference to
liquid market instruments and applying extrapolation techniques to match the appropriate risk profile.
Observability: In general, input parameters are deemed observable up to liquid maturities which are determined separately for each parameter and
underlying.
Level 3 sensitivity: Sensitivity is estimated based on the dispersion of consensus data services either directly or through proxies.
Commodity derivatives
Description: These products are exchange traded and OTC derivatives based on underlying commodities such as metals, crude oil and refined
products, agricultural, power and natural gas.
Valuation: The valuations of commodity swaps and options are determined using models incorporating discounting of cash flows and other industry
standard modelling techniques. Valuation inputs include forward curves, volatilities implied from market observable inputs and correlations.
Unobservable inputs are set with reference to similar observable products or by applying extrapolation techniques from the observable market.
Observability: Certain correlations, forward curves and volatilities for longer dated exposures are unobservable.
Level 3 sensitivity: Sensitivity is determined primarily by measuring historical variability over two years. Where historical data is unavailable or
uncertainty is due to volumetric risk, sensitivity is measured by applying appropriate stress scenarios or using proxy bid-offer spread levels.
The Strategic Report Governance Risk review Financial review Financial statements Shareholder information