Annual report 2004 (PDF, 4141 kB) - Unicredit Bank

16 DERIVATIVE FINANCIAL INSTRUMENTS AND TRADING LIABILITIES
The Group utilises the following derivative instruments for both hedging and non-hedging
purposes:
Currency forwards represent commitments to purchase foreign and domestic currency,
including undelivered spot transactions.
Forward rate agreements are individually negotiated interest rate futures that call for a cash
settlement at a future date for the difference between a contracted rate of interest and the
current market rate, based on a notional principal amount.
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. 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.
The notional amounts of certain types of financial instruments provide a basis for comparison
with instruments 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 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 nominal and fair values of derivative instruments held are set out
in the following table.
84