As part of the process of acquisition of loans from Participating Institutions, the Group acquired a number of derivatives that were related to underlying loans.

In addition the Group enters derivative contracts to hedge its exposure to interest rate and foreign exchange risk.

The Group has established policies to manage the risks that arise in connection with derivatives, including hedging policies, which are explained in Notes 21 and 22.

The notional amounts of certain types of financial instruments do not necessarily represent the amounts of future cash flows involved or the current fair value of the instruments and, therefore, are not a good indication of the Group's exposure to credit or market risks. Derivative instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in market interest rates or foreign exchange rates relative to their terms. The aggregate contractual or notional amount of derivative financial instruments on hand, the extent to which instruments are favourable or unfavourable, and thus the aggregate fair value of derivative financial assets and liabilities, can fluctuate significantly over time.

Currency and interest rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an economic exchange of currencies or interest rates (for example, fixed rate for floating rate) or a combination of all these (for example, cross-currency interest rate swaps). The Group's credit risk represents the potential cost of replacing the swap contracts if a counterparty fails to fulfil its obligations under the contract. This risk is monitored on an ongoing basis with reference to the current fair value.

Interest rate options are contractual agreements under which the seller (writer) grants the purchaser (holder) the right, but not the obligation, either to buy (a call option) or sell (a put option) at or by a set date or during a set period, a specific amount of a financial instrument at a predetermined price. The seller receives a premium from the purchaser in consideration for the assumption of interest rate risk. The Group is exposed to credit risk on options acquired from Participating Institutions only, and only to the extent that they have a carrying amount.

The fair values, and notional amounts thereon, of derivative financial instruments held are set out below.

		Fair values
Group 31 December 2012	Notional amount €'000	Assets €'000	Liabilities €'000	Net €'000
(a) Derivatives at fair value through profit or loss
Derivative financial instruments acquired from borrowers	4,031,893	321,842	-	321,842
Other derivative financial instruments	1,264,005	17,114	(154,985)	(137,871)
Foreign currency derivatives	6,247,180	11,750	(305,956)	(294,206)
(b) Derivative financial instruments designated in hedge relationships
Interest rate swaps	18,100,000	-	(707,747)	(707,747)
Total derivative assets/(liabilities)	29,643,078	350,706	(1,168,688)	(817,982)

		Fair values
Group 31 December 2011	Notional amount €'000	Assets €'000	Liabilities €'000	Net €'000
(a) Derivatives at fair value through profit or loss
Derivative financial instruments acquired from borrowers	6,125,867	374,367	-	374,367
Other derivative financial instruments	2,446,468	9,382	(155,791)	(146,409)
Foreign currency derivatives	8,622,607	57,332	(289,830)	(232,498)
(b) Derivative financial instruments designated in hedge relationships
Interest rate swaps	20,300,000	7,458	(283,104)	(275,646)
Total derivative assets/(liabilities)	37,494,942	448,539	(728,725)	(280,186)

Movement recognised in the income statement and other comprehensive income

The table below shows the net fair value position on derivatives at 31 December 2011 and 2012. The movement is recognised either in the income statement on derivatives where hedge accounting is not applied, Note 7, in unrealised foreign exchange losses on derivative financial instruments, Note 10, or in other comprehensive income where hedge accounting is applied, Note 34.

	Fair values
Group	2012 €'000	2011 €'000	Movement €'000
(a) Derivatives at fair value through profit or loss
Derivative financial instruments acquired from borrowers (Note 7)	321,842	374,367	(52,525)
Other derivative financial instruments (Note 7)	(137,871)	(146,409)	8,538
Foreign currency derivatives (Note 10)	(294,206)	(232,498)	(61,708)
(b) Derivative financial instruments designated in hedge relationships
Interest rate swaps (Note 34)	(707,747)	(275,646)	(432,101)
Net derivative fair value movement	(817,982)	(280,186)	(537,796)

(a) Derivative financial instruments at fair value through profit or loss

Derivative financial instruments acquired from borrowers relate to the fair value of derivatives acquired from borrowers that were associated with loans acquired. The fair value of these derivatives at year end was €322m (2011: €374m) and the fair value movement on these derivatives in the year was a loss of €53m (2011: €90m) (see Note 7).

Other derivative financial instruments relate to the fair value of derivatives entered into by the Group to hedge derivative financial instruments acquired from borrowers. These derivatives have not been designated into hedge relationships.

Following the transfer of assets from Participating Institutions and given that NAMA pays for these loans with Euro denominated bonds, NAMA entered into foreign currency derivatives to reduce its exposure to exchange rate fluctuation arising on foreign denominated loans and receivables acquired.

(b) Derivative financial instruments designated in hedge relationships

At the reporting date, NAMA had entered into €18.1 billion of interest rate swaps to hedge its exposure to interest rate risk arising from Euribor floating rates.

NAMA has issued debt securities of €30 billion with a floating rate coupon based on Euribor. Financial instruments priced at floating rate, are sensitive to interest rate fluctuations in Euribor rates, which in turn impacts on the amount of interest expense payable on debt securities in issue. These swaps allow NAMA to exchange fixed cash flows for floating cash flows, i.e. it pays fixed interest to the swap counterparties and receives floating interest, which in turn NAMA uses to pay floating interest to the holders of its debt securities in issue.

As market interest rates fluctuate up or down, this impacts on the value of the interest rate swaps. For example, if Euribor rates decrease, and the swap is paying fixed cash flows at a rate higher than Euribor, then the value of that derivative declines because it is cheaper to borrow in the open market.

The value of the derivatives will fluctuate over the life of the derivative but these fluctuations are unrealised gains and losses and will ultimately terminate with a nil value. The derivatives are entered into for risk management purposes and under IFRS are allowed to be designated into hedge relationships. Any gains or losses on derivatives in hedge relationships are not immediately recognised through profit or loss as the intention is to reduce volatility in the income statement. Therefore the gains and losses are recognised in other comprehensive income.

These interest rate swaps were formally designated into hedge relationships during 2010, when the fair value of these derivatives was (negative) €30.4m. This amount was recognised as a fair value loss on other derivative financial instruments in the income statement in 2010. This fair value gain is amortised as hedge ineffectiveness over the remaining life of the derivatives. A cumulative amount of €23.6m (2011: €15.9m) has been recognised as income in the income statement and cash flow hedge reserve. The total loss for the financial year on cash flow hedges of (€432m) (2011: €323m) is recognised in the cash flow hedge reserve in other comprehensive income (see Note 34). This is an unrealised movement.

The Agency held no derivatives at the reporting date.

The table represents a) the periods in which the actual cash flows are expected to occur and b) the period in which the hedged cash flows are expected to impact the income statement, excluding any hedge accounting adjustments that may be applied.

Group 31 December 2012	0-6 months €'000	6 months - 1 year €'000	1-5 years €'000	More than 5 years €'000	2012 Total €'000
a) Expected to occur	38,464	22,060	213,982	-	274,506
b) Expected to accrue	27,472	20,758	201,298	-	249,528

Group 31 December 2011	0-6 months €'000	6 months - 1 year €'000	1-5 years €'000	More than 5 years €'000	2011 Total €'000
a) Expected to occur	120,116	91,755	703,538	43,815	959,224
b) Expected to accrue	101,208	85,528	662,648	29,761	879,145

The cash flows in a) differ from b) by the amount of interest already accrued and not yet paid in the year.

There is no cash flow hedging applied in the Agency.