Capital management
Risk management
Equity hedging
Our risk management processes ensure close and ongoing monitoring of all our capital measures. The following table shows the material equity derivatives within the group’s shareholder funds at 30 June 2009 that are used as part of a long-term strategy to manage equity risk. It excludes derivatives used for portfolio management purposes:
| Derivative | Notional £bn1 |
Market fall below protection level%2,4 |
Market fall required before protection starts%3,4 |
Outstanding duration |
|---|---|---|---|---|
| (a) | 2.5 | – | 19% | < 6 months |
| (b) | 6.1 | – | 27% | 6-11 months |
| (c) | 0.5 | – | 12% | 12 months |
- The notional represents the notional amount of hedging as at 30 June 2009.
- The “Market fall below protection level” shows the percentage the market has fallen below the protection level as at 30 June 2009.
- The “Market fall required before protection starts” shows the percentage the market would have to fall from the 30 June 2009 position before the derivative moves into the money.
- Derivatives (a), (b) and (c) each represent a collection of derivatives with different strike prices. The strike prices used in the above calculations are the weighted average strikes of thederivatives in each bucket.
Interest rate hedging
Interest rate hedges are used widely to manage asymmetric interest rate exposures across our life insurance businesses as well as an efficient way to manage cash flow and duration matching. The most material examples of uses to hedge guarantees relate to minimum interest rate guarantees in the Netherlands, and also guaranteed annuity exposures in both the UK and Ireland. These hedges are used to protect against interest rate falls and are sufficient in scale to materially reduce the Group’s interest rate exposure.
