HSBC 2006 Annual Report Download - page 358

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Notes 17 and 18
356
At 31 December 2006, the fair values of outstanding financial instruments designated as hedges of net investments in
foreign operations were liabilities of US$254 million (2005: US$114 million).
The ineffectiveness recognised in ‘Net trading income’ in the year ended 31 December 2006 that arose from hedges
in foreign operations was nil (2005: nil).
Sensitivity of fair values to changing significant assumptions to reasonably possible alternatives
Fair values of certain derivatives recognised in the financial statements may be determined in whole or in part using
valuation techniques based on assumptions that are not supported by prices from current market transactions or
observable market data. In these instances, the net fair value recorded in the financial statements is the sum of three
components:
– the value given by application of a valuation model, based upon HSBC’s best estimate of the most appropriate
model inputs;
– any fair value adjustments to account for market features not included within the valuation model (for example,
bid-mid spreads, counterparty credit spreads and/or market data uncertainty); and
– inception profit, or an unamortised element thereof, not recognised immediately in the income statement in
accordance with Note 2(k).
As the valuation models are based upon assumptions, changing the assumptions changes the resultant estimate of fair
value. HSBC performs various sensitivity analyses on its valuation assumptions. The potential effect of using
reasonably possible alternative assumptions in valuation models has been quantified as a reduction in assets of
approximately US$72 million (2005: US$77 million) using less favourable assumptions, and an increase in assets of
approximately US$69 million (2005: US$73 million) using more favourable assumptions. The ranges of reasonably
possible alternative assumptions are established by application of professional judgement to an analysis of the data
available to support each assumption.
The total amount of the change in fair value estimated using a valuation technique that was recognised in the year
ended 31 December 2006 was a loss of US$195 million (2005: US$129 million).
18 Financial investments
HSBC
2006 2005
US$m US$m
Financial investments:
– not subject to repledge or resale by counterparties ................................................................... 197,055 176,301
– which may be repledged or resold by counterparties ............................................................... 7,751 6,041
204,806 182,342
2006 2005
Carrying
amount
Fair
value
Carrying
amount
Fair
value
US$m US$m US$m US$m
Treasury and other eligible bills ................................... 25,313 25,313 25,042 25,042
– available-for-sale .................................................. 25,268 25,268 24,834 24,834
– held-to-maturity .................................................... 45 45 208 208
Debt securities .............................................................. 171,196 171,498 149,781 149,962
– available-for-sale .................................................. 161,870 161,870 141,699 141,699
– held-to-maturity .................................................... 9,326 9,628 8,082 8,263
Equity securities ........................................................... 8,297 8,297 7,519 7,519
– available-for-sale .................................................. 8,297 8,297 7,519 7,519
Total financial investments ........................................... 204,806 205,108 182,342 182,523