HSBC 2008 Annual Report Download - page 169

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and a reduction in the level of loans held for
securitisation.
Derivative products valued using valuation
techniques with significant unobservable inputs
included certain types of correlation products, such
as foreign exchange basket options, foreign
exchange-interest rate hybrid transactions and long-
dated option transactions. Examples of the latter are
equity options, interest rate and foreign exchange
options and certain credit derivatives. Credit
derivatives included tranched CDS transactions. The
increase in derivative assets during the year was
mainly due to (i) the transfer of certain leveraged
credit derivative transactions into this category
because widening credit spreads increased the
significance of unobservable credit spread
volatilities, and (ii) a general increase in the
fair value of derivative assets during 2008.
Trading liabilities valued using a valuation
technique with significant unobservable inputs
principally comprised equity-linked structured note
transactions. These notes, which HSBC issues to
investors, provide the counterparty with a return that
is linked to the performance of certain equity
securities.
The increase in derivative liabilities valued
using a valuation technique with significant
unobservable inputs was due to the general increase
in the fair value of derivative liabilities during 2008.
Effect of changes in significant unobservable
assumptions to reasonably possible
alternatives
As discussed above, the fair value of financial
instruments are, in certain circumstances, measured
using valuation techniques that incorporate
assumptions that are not evidenced 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
these fair values to reasonably possible alternative
assumptions:
Reflected in profit or loss Reflected in equity
Favourable
changes
Unfavourable
changes
Favourable
changes
Unfavourable
changes
US$m US$m US$m US$m
At 31 December 2008
Derivatives, trading assets and trading liabilities1 ........ 1,266 (703) – –
Financial assets and liabilities designated at fair value 30 (30) – –
Financial investments: available for sale ..................... – – 984 (1,005)
At 31 December 2007
Derivatives, trading assets and trading liabilities1 ........ 602 (415) – –
Financial assets and liabilities designated at fair value 30 (30) – –
Financial investments: available for sale ..................... – – 529 (591)
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 unobservable inputs in relation to
derivatives, trading assets and trading liabilities
during the year primarily reflected increased
sensitivity of instruments to unobservable
parameters across asset and liability classes.
Principal assumptions used in the valuation of financial instruments with significant unobservable inputs
Reflected in profit or loss Reflected in equity
Favourable
changes
Unfavourable
changes
Favourable
changes
Unfavourable
changes
US$m US$m US$m US$m
At 31 December 2008
Private equity investments ............................................ 28 (28) 234 (261)
Asset-backed securities ................................................ 90 (91) 667 (660)
Leveraged finance ........................................................ 2 (2) – –
Loans held for securitisation ........................................ 41 (41) – –
Structured notes ............................................................ 8 (8) – –
Derivatives with monolines .......................................... 341 (250) – –
Other derivatives ........................................................... 652 (224) – –
Other portfolios ............................................................. 134 (89) 83 (84)