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10. DERIVATIVE FINANCIAL INSTRUMENTS (CONT’D)
The table below shows the fair value of derivative financial instruments recorded as assets or liabilities together with their
notional amounts:
Group and Bank
2013
2012
Fair Value
Notional
Fair Value
Notional
Assets
Liability
Amount
Assets
Liability
Amount
RM’000
RM’000
RM’000
RM’000
RM’000
RM’000
Derivative used as fair value hedges
Interest rate swaps
–
31,070
1,844,107
20,927
–
1,721,654
Cross currency interest rate swap
–
26,774
548,275
–
–
–
Derivative held for trading
Forward foreign exchange contract
379
491
48,567
–
–
–
Total
379
58,335
2,440,949
20,927
–
1,721,654
At their inception, derivatives often involve only mutual exchange of promises with little or no transfer of consideration
However, these instruments frequently involve a high degree of leverage and are very volatile. A relatively small movement
in the value of the asset, rate or index underlying a derivative contract may have a significant impact on the profit or loss of
the Bank.
Over-the-counter derivative may expose the Bank to the risks associated with absence of an exchange market on which to
close out an open position.
Swaps
Swaps are contractual agreements between two parties to exchange streams of payments over-time based on specified
notional amounts, in relation to movements in a specified underlying index such an interest rate, foreign currency rate or
equity index.
Interest rate swaps relate to contracts taken out by the Bank with other financial institutions in which the Bank either receives
or pays a floating rate of interest, respectively, in return for paying or receiving a fixed rate of interest. The payment flows are
usually netted against each other with the difference being paid by one party to the other.
In a cross currency interest rate swap, the Bank swaps its fixed coupon interest rate into a floating rate coupon on a
different currency.
Forwards
Forward are contractual agreements to buy or sell a specified financial instrument of a specific price and date in the future.
Forwards are customised contracts transacted in the over the-counter market. Future contracts are transacted in standardised
amounts on regulated exchanges and are subject to daily cash margin requirements.
The Bank enters into Forward Exchange Contract to sell or buy a specific amount of currency at a specified exchange rate for
settlement in the future. The contract is entered for the Bank’s own requirement or on behalf of customer based on approved
foreign exchange line.
EXIM Bank Annual Report 2013
131