25. Other derivative financial instruments

Accounting policies

In the course of its activities, the Group uses derivative financial instruments designated for the purpose of managing the risks associated with its operations. The most frequently used derivative instruments include: IRS, CIRS, FX Swap, options, commodity swap, FRA, Forward and Futures. Derivative financial instruments are recognized at fair value from the transaction date. A derivative instrument is presented under “Derivative financial instruments” as an asset if its fair value is positive, and as a liability if its fair value is negative.

Annual report

The Group recognizes changes in the fair values of derivative instruments not classified as cash flow hedges and the result on the settlement of those instruments in the result on financial instruments measured at fair value through profit or loss, or in net foreign exchange gains, depending on the type of derivative.

Embedded derivative instruments

With respect to embedded derivatives, the Group assesses whether a given contract contains an embedded derivative instrument as at the moment of concluding the contract. A reassessment can only be made when there is a change in the terms of the contract that significantly modifies the cash flows resulting from the contract. Derivative instruments which may be separated from the host contract, which do not constitute financial assets, and separately recognized in books of account are measured at fair value. The measurement is presented in the statement of financial position under “Other derivative instruments”. The Group recognizes changes to the fair value measurement of derivative instruments in the income statement under “Gain/(loss) on financial instruments measured at fair value through profit or loss” or “Net foreign exchange gains/(losses)”.

Estimates and judgements

The fair value of non-option derivatives is determined using valuation models based on discounted cash flows expected to be received from the given financial instrument. The valuation techniques used by the Group for non-option derivative instruments are based on yield curves based on available market data (deposit rates on interbank market, IRS quotations).

Options are valued using option pricing models. The variables and assumptions used in a valuation include, where available, data derived from observable markets.

The fair value of derivative instruments accounts for DVA (debit value adjustment), and CVA (credit value adjustment). The process of calculating CVA and DVA adjustments covers methods of designating the counterparty’s or the Group’s credit risk spread (e.g. the market based measurement based on liquid quotations of prices of debt instruments issued by the counterparty, the implicated spread from Credit Default Swap contracts), estimating the probability of the counterparty’s or the Bank’s default and the recovery rate, as well as the calculation of CVA and DVA adjustments.

Financial information

Other derivative instruments – by type 31.12.2018 31.12.2017
Assets Liabilities Assets Liabilities
IRS 1 178 1 832 875 1 385
CIRS 156 153 77 60
FX Swap 115 43 161 380
Options 262 268 254 250
Commodity swap 85 83 129 128
FRA 3 2 1 1
Forward 108 274 206 324
Futures 7 8
Other 1
Total 1 907 2 655 1 711 2 536

Calculation of estimates

The Group conducted a simulation to assess the potential influence of changes in the yield curves on the transaction value.

Estimated change in valuation following
a parallel movement in yield curves:
31.12.2018 31.12.2017
+50 bp scenario -50 bp scenario +50 bp scenario -50 bp scenario
IRS (145) 147 (83) 84
CIRS (253) 259 (117) 120
other instruments 3 (3) 7 (7)
Total (395) 403 (193) 197

As at 31 December 2018, the amount of CVA and DVA adjustments amounted to PLN 0 million (as at 31 December 2017: PLN 2 million).

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