Notes

Note 16 - Financial derivatives at fair value through profit or loss

Financial derivatives

Financial derivatives are integrated components in the investment philosophies and startegies of the Gard group's fund management. They are used for risk management, liquidity improvement, cost reduction and to optimise return within the guidelines set for the Gard group's fund management. The Gard group has implemented derivative overlay programme whereby regional equity specialists are employed with mandates which have historically provided value creation from active management. The market exposure is then hedged out through equity futures contracts in order to maintain total equity market exposure within the allowed range, and simultaneously fixed income exposure is gained through interest rate swap contracts.

Investment guidelines

The key features of the Gard group’s derivative guidelines are as follows:

The aggregate economic exposure of the group’s investment portfolio may not exceed 100 per cent of the portfolio’s market value, i.e., there must be no leverage or gearing of the portfolio.

Compliance monitoring

Compliance with the guidelines is monitored on an ongoing basis through the use of both internal and external resources. Even though the investment managers have internal risk analysis and compliance monitoring processes there is independent verification based on alternative sources of data. The global custodian is responsible for compliance monitoring and reporting both at the overall fund level and the individual portfolio level. The investment managers are also subject to a bi-annual independent assessment of investment processes and skills to ensure that, inter alia, risk management and compliance monitoring routines are satisfactory.

Valuation and reporting

All derivative instruments are carried at independently sourced market values in accordance with principles described under note 2. Underlying contract values represent the value of the underlying gross commitments of all open contracts.

Types of financial derivatives used during the financial year

Forward exchange contracts

A forward exchange contract is a contract between two parties whereby one party contracts to sell and the other party contracts to buy one currency for another, at an agreed future date, at a rate of exchange which is fixed at the time the contract is entered into.

Interest rate options

An option is a contract in which the writer of the option grants the buyer of the option the right to purchase from or sell to the writer a designated instrument at a specific price within a specified period of time. An interest rate option can be written on cash instruments or futures, and is used to manage the interest rate and volatility exposure of the portfolio. Written options generate gains in stable rate environments, but may create obligations to buy or sell underlying securities under greater rate movements. Purchased options are used to generate gains based on interest rate forecasts.

Interest rate futures

An interest rate futures contract is a standardised agreement between a buyer (seller) and an established exchange or its clearing house in which the buyer (seller) agrees to take (make) delivery of a financial rate instrument at a specified price at the end of a designated period of time.

Interest rate swaps

An interest rate swap is an agreement between two parties to exchange periodic interest payments. In the most common type of swap, one party agrees to pay the other party fixed-interest payments at designated dates for the life of the contract. This instrument is used to change interest rate risk by changing the cash flow of fixed rate bonds to adjustable rate bonds or vice versa.

Equity index future

An equity index future contract is a standardised agreement between a buyer (seller) and an established exchange or its clearing house in which the buyer (seller) agrees to take (make) delivery of an amount based on an equity index at designated point in time.

     Parent company
  Notional Notional Fair value Fair value
Amounts in USD 000's 20.02.17 20.02.16 20.02.17 20.02.16
         
Type of derivatives        
Interest rate related        
Futures 24,824 39,565 0 0
Options 5,400 6,106 (13) (37)
Swaps 209,542 252,281 689 1,785
Net interest rate related 239,766 297,953 675 1,748
         
Equity related contracts        
Futures 142,927 117,657 0 0
Rights/warrants 1 0 1 0
Net equity related 142,928 117,657 1 0
         
Foreign currency related        
Forward foreign exchange contracts  361,578 496,514 (188) 1,169
Net foreign currency related 361,578 496,514 (188) 1,169
         
Net financial derivative assets/(liabilities)     488 2,917
         
Financial derivative assets     3,674 7,596
Financial derivative liabilities     (3,186) (4,679)
Net financial derivative assets/(liabilities)     488 2,917
         
     Consolidated accounts
  Notional Notional Fair value Fair value
Amounts in USD 000's 20.02.17 20.02.16 20.02.17 20.02.16
         
Type of derivatives        
Interest rate related        
Futures 84,149 92,565 0 0
Options 15,000 16,837 (36) (103)
Swaps 559,698 623,810 421 3,250
Net interest rate related 658,847 733,213 384 3,147
         
Equity related contracts        
Futures 231,886 196,575 0 0
Rights/warrants 1 0 1 0
Net equity related 231,886 196,575 1 0
         
Foreign currency related        
Forward foreign exchange contracts  806,834 997,052 235 (6,606)
Net foreign currency related 806,834 997,052 235 (6,606)
         
Net financial derivative assets/(liabilities)     621 (3,459)
         
Financial derivative assets     9,420 15,839
Financial derivative liabilities     (8,799) (19,297)
Net financial derivative assets/(liabilities)     621 (3,459)