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Financial derivatives are used in asset management to adjust the exposure in various portfolios, as a cost efficient alternative to trading in the underlying securities. this may be to adjust the exposure to equities, bond or the fixed-income markets in general, or to specific markets or companies.

table 9.1 is a specification of financial derivatives holdings at market value as at 31 december 2013 and 31 december 2012, classified as assets or liabilities. table 9.2 shows exposure expressed as the notional

amount of financial derivatives for long and short positions. Notional amounts (the nominal values of the underlying) are the basis for the calculation of any cash flows and gains/losses for the contracts. the sum of the absolute amount of long and short positions is the gross exposure, which provides information about the extent to which different types of financial derivatives are used. the net position is the difference resulting from subtracting short positions from long positions. this is an indication of the total risk exposure from each type of financial derivative.

table 9.1 Specification financial derivatives

fair value

31.12.2013 31.12.2012

amounts in noK million asset liability net asset liability net

Foreign exchange contracts 460 273 187 88 145 -57 listed futures contracts 147 1 033 -886 221 91 130 interest rate swaps 574 699 -125 703 2 120 -1 417 credit default swaps - - - - equity swaps 55 352 -297 435 244 191 total swap contracts 629 1 051 -422 1 138 2 364 -1 226 Options 382 - 382 - - - total financial derivatives 1 618 2 357 -739 1 447 2 600 -1 153 table 9.2 Financial derivatives – exposure

amounts in noK million

exposure

31.12.2013 average 2013 31.12.2012 average 2012

long short long short long short long short

Foreign exchange

contracts 46 504 - 53 068 - 49 729 - 81 006 - listed futures contracts* 8 964 26 214 5 352 15 566 4 067 20 190 3 605 19 050 interest rate swaps 2 226 16 430 3 307 13 698 4 293 13 271 5 333 15 849 credit default swaps - - - - 728 5 equity swaps* 131 1 265 1 664 1 008 4 660 822 2 759 1 161 total swap contracts 2 357 17 695 4 971 14 706 8 953 14 093 8 820 17 015 Options 382 - 263 - - - - - total financial derivatives 58 207 43 909 63 654 30 272 62 749 34 283 93 431 36 065

exchAnge-listed futures contrActs Futures contracts are listed contracts to exchange a specified asset (security, index, interest rate or other) at an agreed price, with future delivery, normally settled in cash, and with initial and daily margin settle- ment of gains and losses. Exposure is the notional amount of the contracts, and reflects whether Norges Bank receives (long positions) or pays (short positions) payments in the event of the underlying increasing in value.

oVer-the-counter (otc) finAnciAl deriVAtiVes

Foreign exchange contracts

this item consists of foreign currency exchange contracts (forwards) with normal settlement for future delivery. Contract exposure is the sum of the notional amount of the contracts at any given point in time. With a foreign exchange contract both a long and a short position are held, as one buys one currency and sells another. All positions are shown as long positions.

Interest rate swaps

Interest rate swaps are agreements between two parties to exchange interest payment streams based on different interest rate calculation methods; typically one party pays a floating rate of interest and the other pays a fixed rate.

Exposure is the notional amount of the contract and the direction (long/short) indicates whether Norges Bank is receiving (long) or is paying (short) a fixed rate of interest.

Credit default swaps

In a credit default swap, the seller of protection receives a periodic premium or lump sum from the purchaser of protection as compensation for assuming the credit risk. the purchaser receives payment from the seller only if the credit protection of the underlying credit is triggered (a credit event). A credit event might, for example, be a default on the underlying credit or bond loan. the protection normally expires after the first credit event.

the underlying credit for credit default swaps are corporate bonds, securities issued by sovereigns and corporate bond indices.

Exposure direction (long/short) indicates whether Norges Bank has purchased or sold protection for all or part of the credit risk associated with the various types of underlying assets.

Equity swaps

Equity swaps are agreements between two counter- parties to exchange cash flows based on changes in the underlying security (the equity leg) and normally a floating interest rate. In addition to the periodic cash flow, the buyer will receive payments in connection with dividends and corporate events. A variant of equity swaps are Contracts for difference (CFd), where the buyer and the seller on an on-going basis will settle between them the difference between the present value of the underlying equity or index, and the value at the transaction date. If the difference is positive the seller will pay to the buyer, while if the difference is negative the buyer will pay to the seller.

Exposure corresponds to the notional amount of the contracts, and reflects whether Norges Bank shall receive (long) or pay (short) the return from the underlying equity, or for CFds whether Norges Bank is receiving (long) or is paying cash as the value of the equity or index increases compared with the value at the transaction date.

Options

the buyer of an option pays for the right to buy or sell an asset at an agreed price at or within a certain time in the future, while the seller has the obligation to buy or sell the asset at the agreed price and time. Options include swaptions which are agreements which grant the buyer the right to enter into a swap.

Exposure is the fair value of the contracts. Options written by Norges Bank are reported as sold. Options where Norges Bank has paid a premium are reported as purchased contracts.