HSBC 2001 Annual Report Download - page 118

HSBC HOLDINGS PLC
Financial Review (continued)
116
Daily distribution of market risk revenues in 2001 Daily distribution of market risk revenues 2000
Profit and loss frequency
Foreign exchange exposure
HSBCs foreign exchange exposures comprise
trading exposures and structural foreign currency
translation exposure.
Trading exposure
Foreign exchange trading exposures comprise those
which arise from foreign exchange dealing within
Treasury, and currency exposures originated by
commercial banking businesses in HSBC. The latter
are transferred to local treasury units where they are
managed, together with exposures which result from
dealing activities, within limits approved by the
Group Executive Committee. VAR on foreign
exchange trading positions is shown in the table on
page 115.
The average one-day foreign exchange revenue
in 2001 was US$3.0 million compared with US$2.8
million in 2000.
Structural currency exposure
HSBCs main operations are in the United Kingdom,
Hong Kong, France, the United States and Brazil,
although it also has operations elsewhere in Europe,
the rest of Asia-Pacific, North America and Latin
America. The main operating (or functional)
currencies in which HSBCs business is transacted
are, therefore, sterling, Hong Kong dollars, euros,
US dollars and Brazilian reais.
Since the currency in which HSBC Holdings
prepares its consolidated financial statements is US
dollars, HSBCs consolidated balance sheet is
affected by movements in the exchange rates
between these functional currencies and the US
Profit and loss frequency
dollar. These currency exposures are referred to as
structural currency exposures. Translation gains and
losses arising from these exposures are recognised in
the statement of total consolidated recognised gains
and losses. These exposures are represented by the
net asset value of the foreign currency equity and
subordinated debt investments in subsidiaries,
branches and associated undertakings.
HSBCs structural foreign currency exposures
are managed with the primary objective of ensuring,
where practical, that HSBCs and individual banking
subsidiaries tier 1 capital ratios are protected from
the effect of changes in exchange rates. This is
usually achieved by holding qualifying tier 1 capital
broadly in proportion to the corresponding foreign-
currency-denominated risk-weighted assets at a
subsidiary bank level. HSBC considers hedging
structural foreign currency exposures only in limited
circumstances, to protect the tier 1 capital ratio or the
US dollar value of capital invested. Such hedging
would be undertaken using forward foreign exchange
contracts or by financing with borrowings in the
same currencies as the functional currencies
involved.
As subsidiaries are generally able to balance
adequately foreign currency tier 1 capital with
foreign currency risk-weighted assets, HSBCs
foreign currency structural exposures are usually
unhedged, including exposures due to foreign-
currency-denominated profits arising during the year.
Selective hedges were, however, transacted during
2001. There was no material effect from foreign
currency exchange rate movements on HSBC or,
outside of Argentina, subsidiary tier 1 capital ratios
during the year. In Argentina the mandatory
6
12
27
46 46 48
33
16
11
56
1001
0
10
20
30
40
50
Number of days
0 2 4 6 8 1012141618202224262830
Revenues (US$m)
11
16
28
46
59 52
22
16
7
011
0
10
20
30
40
50
60
Number of days
-4 0 4 8 121620242832364044
Rev enu es (US$ m)