Annual Report & Accounts 2009

Anglo Irish Bank
Annual Report & Accounts 2009
21. Derivative financial instruments
Derivative financial instruments derive their value from the price of underlying variables such as interest rates, foreign exchange
rates, credit spreads or equity or other indices. Such instruments enable users to efficiently reduce or alter exposure to market
risks. The Group uses derivatives for two primary purposes: to manage and hedge the market risks that arise naturally in its
banking and other activities, and to provide risk management solutions for corporate clients for the purpose of assisting these
clients in managing their exposures to changes in interest rates and foreign exchange rates. The Group also transacts derivatives
on a limited basis for discretionary trading purposes.
With the exception of designated hedging derivatives, as defined by IAS 39, derivatives are treated as held for trading. The held
for trading classification comprises corporate sales derivatives, economic hedges which do not meet the strict qualifying criteria
for hedge accounting, derivatives managed in conjunction with financial instruments designated at fair value and the Group's
trading book.
The notional amount of a derivative contract does not necessarily represent the Group's real exposure to credit risk, which is
limited to the current replacement cost of contracts with a positive fair value to the Group should the counterparty default. To
reduce credit risk on interbank derivatives the Group uses a variety of credit enhancement techniques such as master netting
agreements and collateral support agreements ('CSAs'), where cash security is provided against the exposure. Derivatives are
carried at fair value and shown in the balance sheet as separate totals of assets and liabilities.
Details of the objectives, policies and strategies arising from the Group's use of financial instruments, including derivative
financial instruments, are presented in note 51 on risk management and control.
The following tables present the notional and fair value amounts of derivative financial instruments, analysed by product and
category.
Derivatives held for trading
31 December 2009
The Group
30 September 2008
Contract
Contract
notional Fair values notional Fair values
amount Assets Liabilities amount Assets Liabilities
€m €m €m €m €m €m
Interest rate contracts 127,702 1,709 (2,392) 203,604 930 (963)
Foreign exchange contracts 15,931 240 (133) 22,159 507 (311)
Credit derivatives 20 - (3) 125 - (5)
Equity index options - held and written 636 14 (11) 658 49 (44)
Total trading derivatives 144,289 1,963 (2,539) 226,546 1,486 (1,323)
Derivatives held for hedging
Fair value hedges 7,054 345 (44) 8,878 345 (108)
Cash flow hedges 14,650 175 - 11,612 151 (51)
Total hedging derivatives 21,704 520 (44) 20,490 496 (159)
Derivatives held in respect of liabilities to
customers under investment contracts
(note 40) 1,100 - (86) 1,207 13 (8)
Total derivative financial instruments 167,093 2,483 (2,669) 248,243 1,995 (1,490)
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