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Notes to the Consolidated Financial Statements

16. Derivative financial instruments

The Group’s approach to the management of financial risks is set out in the Business Review. The Group’s outstanding derivative financial instruments are as follows:

             
All figures in millions 2007 2006
Gross notional
amounts
Assets Liabilities Gross notional
amounts
Assets Liabilities
Interest rate derivatives –
in a fair value hedge relationship
522 18 (8) 953 20 (17)
Interest rate derivatives –
not in a hedge relationship
796 7 (8) 1,026 9 (2)
Cross currency rate derivatives –
in a net investment hedge relationship
100 17 230 40
Cross currency rate derivatives –
not in a hedge relationship
50 9 180 17
Total 1,468 51 (16) 2,389 86 (19)
Analysed as expiring:
In less than one year 320 28 976 50
Later than one year and not later
than five years
796 13 (8) 1,005 26 (4)
Later than five years 352 10 (8) 408 10 (15)
Total 1,468 51 (16) 2,389 86 (19)

The carrying value of the above derivative financial instruments equals their fair value. Fair values are determined by using market data and the use of established estimation techniques such as discounted cash flow and option valuation models.

At the end of 2007, the currency split of the mark-to-market values of rate derivatives, including the exchange of principal on cross currency rate derivatives, was US dollar (119)m, and sterling 154m (2006: US dollar (247)m, euro 157m and sterling 157m).

The fixed interest rates on outstanding rate derivative contracts at the end of 2007 range from 4.45% to 7.00% (2006: 3.02% to 7.00%) and the floating rates are based on LIBOR in US dollar and sterling.

The Group’s portfolio of rate derivatives is diversified by maturity, counterparty and type. Natural offsets between transactions within the portfolio and the designation of certain derivatives as hedges significantly reduce the risk of income statement volatility.

Counterparty exposure from all derivatives is managed, together with that from deposits and bank account balances, within credit limits that reflect published credit ratings to ensure that there is no significant risk to any one counterparty. No single derivative transaction had a market value (positive or negative) at the balance sheet date that exceeded 3% of the Group’s consolidated total equity.

At the end of 2006, the Group held an amount of 29m as collateral under a mark-to-market agreement. This reflected the amount, at market rates prevailing at the end of October 2006, owed to the Group by a counterparty for a set of three related rate derivatives. The amount was settled at the beginning of February 2007, along with repayment of the €591m bond.

In accordance with IAS 39 ‘Financial Instruments: Recognition and Measurement’, the Group has reviewed all of its material contracts for embedded derivatives that are required to be separately accounted for if they do not meet certain requirements, and has concluded that there are no material embedded derivatives.

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