14 Derivative financial instruments

Financial instruments

The Group’s objectives and policies on managing the risks that arise in connection with derivatives, including the policies for hedging, are included in Note to Note under the headings ‘Financial Risks’, ‘Market Risk’, ‘Credit Risk’ and ‘Liquidity Risk’.

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 rates or prices 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.

The fair value of a derivative contract represents the amount at which that contract could be exchanged in an arms-length transaction, calculated at market rates current at the balance sheet date.

The fair values and notional amounts of derivative instruments held for trading are set out in the following table:

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2007  2006 
Notional  Fair value Notional  Fair value
contract  contract 
Year ended 31st December  amount  Assets  Liabilities  amount  Assets  Liabilities 
Derivatives held for trading  £m  £m  £m  £m  £m  £m 
Foreign exchange derivatives 
Forward foreign exchange  1,041,781  11,381  (11,629) 767,734  8,074  (7,808)
Currency swaps  562,682  15,617  (14,676) 411,889  10,029  (10,088)
OTC options bought and sold  464,575  3,350  (3,995) 320,184  3,923  (3,849)
OTC derivatives  2,069,038  30,348  (30,300) 1,499,807  22,026  (21,745)
Exchange traded futures – bought and sold  139,199  –  –  852  –  – 
Exchange traded options – bought and sold  132  –  –  115  –  – 
Foreign exchange derivatives  2,208,369  30,348  (30,300) 1,500,774  22,026  (21,745)
Interest rate derivatives 
Interest rate swaps  11,758,215  111,746  (110,680) 8,718,015  61,267  (61,510)
Forward rate agreements  1,960,106  755  (738) 1,335,594  337  (374)
OTC options bought and sold  3,776,600  27,337  (26,944) 2,301,239  13,977  (13,558)
OTC derivatives  17,494,921  139,838  (138,362) 12,354,848  75,581  (75,442)
Exchange traded futures – bought and sold  903,516  –  –  1,057,767  188  (256)
Exchange traded options – bought and sold  269,095  102  (64) 848,629  241  (156)
Exchange traded swaps  4,941,417  –  –  3,405,109  –  – 
Interest rate derivatives  23,608,949  139,940  (138,426) 17,666,353  76,010  (75,854)
Credit derivatives 
Swaps  2,472,249  38,696  (35,814) 1,224,548  9,275  (8,894)
Equity and stock index derivatives 
OTC options bought and sold  145,399  11,293  (15,743) 114,227  11,171  (15,613)
Equity swaps and forwards  36,149  1,057  (1,193) 24,580  656  (846)
OTC derivatives  181,548  12,350  (16,936) 138,807  11,827  (16,459)
Exchange traded futures – bought and sold  31,519  –  –  30,159  154  (176)
Exchange traded options – bought and sold  30,930  848  (2,200) 30,473  161  (171)
Equity and stock index derivatives  243,997  13,198  (19,136) 199,439  12,142  (16,806)
Commodity derivatives 
OTC options bought and sold  95,032  4,496  (4,720) 52,899  2,568  (2,443)
Commodity swaps and forwards  276,102  19,075  (18,039) 164,863  14,933  (13,497)
OTC derivatives  371,134  23,571  (22,759) 217,762  17,501  (15,940)
Exchange traded futures – bought and sold  228,465  –  –  68,710  13  (33)
Exchange traded options – bought and sold  66,732  1,197  (943) 9,169  306  (474)
Commodity derivatives  666,331  24,768  (23,702) 295,641  17,820  (16,447)
Derivative assets/(liabilities) held for trading  29,199,895  246,950  (247,378) 20,886,755  137,273  (139,746)