3. Derivative financial instruments
The Group uses a variety of derivative financial instruments including swaps, options, forwards and exchange-traded financial futures in its trading and hedging strategies, in line with the Group’s overall risk management strategy. The objectives include managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing assets or liabilities, as well as to lock in attractive investment conditions for future available funds.
The notional or contractual amounts of derivatives given below represent a standard of measurement of the level of involvement in these types of transactions and are not a quantification of market risk or credit risk. Notional amounts represent those amounts used to calculate contractual cash flows to be exchanged and are not paid or received, except for certain contracts such as currency swaps.
The fair values represent the gross carrying value amounts at the reporting date for each class of derivative contract held or issued by the Group. The fair values below are not an indication of credit risk, as many over-the-counter transactions are contracted and documented under ISDA master agreements or their equivalent. Management believes that such agreements provide for legally enforceable set-off in the event of default, which substantially reduces credit exposure.
The maximum potential loss assuming non-performance by all counterparties, and based on the market replacement cost at 31 December 2002 and 2003, approximated CHF 1 533 million and
CHF 1 933 million, respectively. These values are net of amounts offset pursuant to rights of set-off and qualifying master netting arrangements with various counterparties.
The contractual or notional amounts reported under Credit derivatives include portfolio credit default swap structures and corresponding credit default swaps transacted to hedge certain credit exposure within these structures (2002: 67%, 2003: 41%). The swaps were underwritten by the Credit Solutions business sector of the Financial Services Business Group. Within these structures, the Group continues to maintain over 85% of the notional exposure assigned to the "Super-Senior" category.
As of 31 December 2002 and 2003, the remaining 33% and 59%, respectively, are credit default swaps on the trading book of the Capital Management and Advisory business sector. This figure is reported as the sum of outstanding positions, therefore inflating the notional values of all hedged positions. A considerable proportion of the credit default swaps in the trading book is hedged with offsetting positions. However, the business sector does maintain open long and short positions in credit default swaps and related instruments as part of its trading function.
The notional amount and the fair value of derivatives outstanding at 31 December 2002 and 2003 are as follows:
|
As of 31 December 2002 CHF millions |
Contract/ notional amount
|
Positive fair value |
Negative fair value |
Carrying
value assets/ liabilities |
|
|
||||
Interest rate contracts |
||||
| Forwards and futures |
35349
|
12
|
-55
|
-43
|
| Swaps |
79633
|
1991
|
- 1871
|
120
|
|
|
||||
| Total |
114982
|
2003
|
-1926
|
77
|
Equity and index contracts |
||||
| Forwards and futures |
185
|
13
|
-36
|
-23
|
| Options |
15155
|
967
|
-55
|
912
|
| Swaps |
23
|
2
|
2
|
|
|
|
||||
| Total |
15363
|
982
|
-91
|
891
|
Foreign currency |
||||
| Forwards and futures |
8
|
|||
| Options |
92
|
3
|
3
|
|
| Swaps |
8272
|
2179
|
-2261
|
-82
|
|
|
||||
| Total |
8372
|
2182
|
-2261
|
-79
|
Other derivatives |
||||
| Credit derivatives |
39202
|
180
|
-364
|
-184
|
| Weather derivatives |
31
|
36
|
-29
|
7
|
| Other |
3570
|
41
|
-153
|
-112
|
|
|
||||
| Total |
42803
|
257
|
-546
|
-289
|
|
|
||||
| Total derivative financial instruments |
181520
|
5424
|
-4824
|
600
|
|
|
||||
The Group has reclassified the notional amount and the positive and negative fair values of certain swap transactions from interest rate swaps to foreign currency swaps. The presentation of the fair values has been adjusted to show the net position of the swaps rather than the gross position. The reclassifications do not impact the net carrying values, net income, net equity, or the maximum potential loss.
|
As of 31 December 2003 CHF millions |
Contract/ notional amount
|
Positive fair value |
Negative fair value |
Carrying
value assets/ liabilities |
|
|
||||
Interest rate contracts |
||||
| Forwards and futures |
17202
|
3
|
-11
|
-8
|
| Swaps |
310885
|
1833
|
-1818
|
15
|
|
|
||||
| Total |
328087
|
1836
|
-1829
|
7
|
Equity and index contracts |
||||
| Forwards and futures |
1679
|
167
|
-5
|
162
|
| Options |
33475
|
771
|
-623
|
148
|
|
|
||||
| Total |
35154
|
938
|
-628
|
310
|
Foreign currency |
||||
| Forwards and futures |
440
|
-12
|
-12
|
|
| Options |
660
|
-16
|
-16
|
|
| Swaps |
27312
|
2886
|
-2524
|
362
|
|
|
||||
| Total |
28412
|
2886
|
-2552
|
334
|
Other derivatives |
||||
| Credit derivatives |
36850
|
179
|
-311
|
-132
|
| Weather derivatives |
800
|
50
|
-53
|
-3
|
| Other |
8730
|
69
|
-260
|
-191
|
|
|
||||
| Total |
46380
|
298
|
-624
|
-326
|
|
|
||||
| Total derivative financial instruments |
438033
|
5958
|
-5633
|
325
|
|
|
||||
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