HSBC 2007 Annual Report Download - page 431

429
Available-for-sale financial investments and financial assets designated at fair value that are valued using
non-observable inputs include holdings of private equity and unlisted debt securities.
Effect of changes in significant non-observable assumptions to reasonably possible alternatives
As discussed above, the fair value of financial instruments are, in certain circumstances, measured using valuation
models that incorporate assumptions that are not supported by prices from observable current market transactions in
the same instrument and are not based on observable market data. The following table shows the sensitivity of fair
values to reasonably possible alternative assumptions.
Reflected in profit/(loss) Reflected in equity
Favourable
changes
Unfavourable
changes
Favourable
changes
Unfavourable
changes
US$m US$m US$m US$m
At 31 December 2007
Derivatives/trading assets/trading liabilities1 ............... 602 (415)
Financial assets/liabilities designated at fair value ...... 30 (30)
Financial investments: available-for-sale ..................... 529 (591)
At 31 December 2006
Derivatives/trading assets/trading liabilities ................. 69 (72)
Financial assets/liabilities designated at fair value ...... 16 (16)
Financial investments: available-for-sale...................... 165 (165)
1 Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these financial
instruments are risk-managed.
The increase in the effect of changes in significant non-observable inputs in relation to derivatives/trading
assets/trading liabilities from 31 December 2006 to 31 December 2007 primarily reflects certain mortgage loans
acquired for the purpose of securitisation, and certain US mortgage-backed securities, that were valued using
observable inputs at 31 December 2006 that subsequently became non-observable in the second half of 2007
following the deterioration in market conditions. To a lesser degree, the increase also reflects increased uncertainty in
determining the fair value of credit derivative transactions executed against certain monoline insurers, and a general
increase in structured derivative business.
Changes in fair value recorded in the income statement
The following table details changes in fair values recognised in profit or loss during the period, where the fair value is
estimated using valuation techniques that incorporate significant assumptions that are not supported by prices from
observable current market transactions in the same instrument, and are not based on observable market data:
• the table details the total change in fair value of these instruments; it does not isolate that component of the
change that is attributable to the non-observable component;
• instruments valued with significant non-observable inputs are frequently dynamically hedged with instruments
valued using observable inputs; the table does not include any changes in fair value of these hedges; and
• there were significant assets and liabilities valued using observable inputs at 31 December 2006 that became
valued with significant unobservable inputs during 2007; the table reflects the full change in fair value of those
instruments during 2007, not just that element arising following the category change.
Recorded profit/(loss)
2007 2006
US$m US$m
At 31 December 2007
Derivatives/trading assets/trading liabilities ........................................................................................ 491 (195)
Financial assets/liabilities designated at fair value .............................................................................. 9 (5)
The increase in fair value in 2007 primarily reflects increases in the fair value of credit derivatives purchased from
certain monoline insurers to provide credit protection on portfolios of securities, offset by write-downs in mortgage
loans acquired for the purpose of securitisation, and certain US mortgage-backed securities.