HSBC 2009 Annual Report Download - page 428

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 18
426
Credit derivatives are also deployed to a limited extent for the risk management of the Group’s loan portfolios.
The notional contract amount of credit derivatives of US$1,237,055 million (2008: US$1,583,337 million) consisted
of protection bought of US$614,690 million (2008: US$777,556 million) and protection sold of US$622,365 million
(2008: US$805,781 million).
The difference between the notional amounts bought and sold is attributable to HSBC selling protection on large,
diversified, predominantly investment grade portfolios (including the most senior tranches) and then offsetting risk
on these positions by buying protection on the more subordinated tranches of the same portfolios. In addition, HSBC
uses securities to mitigate risks on certain derivative positions and credit derivative contracts to reduce counterparty
exposures. Consequently, while there is a mismatch in notional amounts of credit derivatives bought and sold this
should not be interpreted as representing the open risk position. The credit derivative business operates within the
market risk management framework described on pages 250 to 261.
Derivatives valued using models with unobservable inputs
The difference between the fair value at initial recognition (the transaction price) and the value that would have been
derived had valuation techniques used for subsequent measurement been applied at initial recognition, less
subsequent releases, is as follows:
Unamortised balance of derivatives valued using models with unobservable inputs
2009 2008
US$m US$m
Unamortised balance at 1 January ........................................................................................................... 204 306
Deferral on new transactions ................................................................................................................... 192 326
Recognised in the income statement during the period:
– amortisation ...................................................................................................................................... (86) (168)
– subsequent to unobservable inputs becoming observable ............................................................... (19) (118)
– maturity, termination or offsetting derivative .................................................................................. (42) (99)
Exchange differences ............................................................................................................................... 11 (38)
Risk hedged ............................................................................................................................................. – (5)
Unamortised balance at 31 December1 .................................................................................................... 260 204
1 This amount is yet to be recognised in the consolidated income statement.
Hedging instruments
HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and
liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing
debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the
maturity and other profiles of its assets and liabilities.
The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and the type
of hedge transactions. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash
flow hedges, or hedges in net investment of foreign operations. These are described under the relevant headings
below.
The notional contract amounts of derivatives held for hedging purposes indicate the nominal value of transactions
outstanding at the balance sheet date; they do not represent amounts at risk.
Notional contract amounts of derivatives held for hedging purposes by product type
At 31 December 2009 At 31 December 2008
Cash flow
hedge
Fair value
hedge
Cash flow
hedge
Fair value
hedge
US$m US$m US$m US$m
Foreign exchange ...................................................................... 12,359 2,469 14,931 2,602
Interest rate ............................................................................... 236,388 42,224 229,785 27,305
248,747 44,693 244,716 29,907