as at December 31, 2003 - EFG Bank Group

30
Notes to the Consolidated Financial Statements (continued)
19. Derivative financial instruments
The Group utilises the following derivative instruments for both hedging and non-hedging purposes:
Currency forwards represent commitments to purchase or sell foreign and domestic currency. Foreign currency and
interest rate futures are contractual obligations to receive or pay a net amount based on changes in currency rates or
interest rates, or buy or sell foreign currency or a financial instrument on a future date, at a specified price, established
in an organised financial market. Since future contracts are collateralised by cash or marketable securities and changes
in the futures contract value are settled daily with the exchange, the credit risk is negligible.
Currency and interest rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an
economic exchange of currencies or interest rates (for example, fixed rate for floating rate) or a combination of all
these (i.e. cross-currency interest rate swaps). Except for certain currency swaps, no exchange of principal takes place.
The Group’s credit risk represents the potential cost to replace the swap contracts if counterparties fail to perform
their obligation. This risk is monitored on an ongoing basis with reference to the current fair value, a proportion of
the notional amount of the contracts and the liquidity of the market. To control the level of credit risk taken, the
Group assesses counterparties using the same techniques as for its lending activities - and/or marks to market with
bilateral collateralisation agreements over and above an agreed threshold.
Foreign currency and interest rate options are contractual agreements under which the seller (writer) grants the
purchaser (holder) the right, but not the obligation, either to buy (a call option) or sell (a put option) at or by a set
date or during a set period, a specific amount of a foreign currency or a financial instrument at a predetermined price.
In consideration for the assumption of foreign exchange or interest rate risk, the seller receives a premium from the
purchaser. Options may be either exchange-traded or negotiated between the Group and a customer (OTC). The
Group is exposed to credit risk on purchased options only, and only to the extent of their carrying amount, which is
their fair value.
The notional amounts of certain types of financial instruments provide a basis for comparison with instruments
recognised on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the
current fair value of the instruments and, therefore, do not indicate the Group’s exposure to credit or price risks. The
derivative instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in market
interest rates or foreign exchange rates relative to their terms. The aggregate contractual or notional amount of
derivative financial instruments on hand, the extent to which instruments are favourable or unfavourable and, thus
the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time. The
fair values of derivative instruments held are set out in the following table:
Dec. 31, 2003
Contract/
notional Fair values
(All figures in thousands of CHF) amount Assets Liabilities
Derivatives held for trading
OTC currency derivatives:
currency forwards 7’197’568 93’700 (81’424)
currency swaps 4’307’343 50’423 (94’595)
OTC currency options bought and sold 1’266’814 22’921 (21’978)
Sub-total 167’044 (197’997)
OTC interest rate derivatives:
interest rate swaps 8’596’491 76’797 (243’043)
cross-currency interest rate swaps 500’490 62’558 (24’112)
OTC interest rate options 3’905’483 23’402 (25’963)
Sub-total 162’757 (293’118)
Exchange traded interest rate futures 2’760’778 2’633 (6’025)
Exchange traded interest rate options 2’060’175 1’437 (889)
Sub-total 166’827 (300’032)
EFG Bank Group