22. Derivative financial instruments

Accounting policies

The Group uses various types of derivatives in order to manage risk involved in its business activities. The most frequently used types of derivatives are: IRS, CIRS, FX Swap, FRA, Options and FX Forward.

Derivative financial instruments are recognised at fair value from the trade 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.

The Group recognises 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.

The notional amounts of the underlying derivative instruments are presented as off-balance sheet items from the trade date until maturity.

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 required under the contract. Derivative instruments separated from host contracts and recognised separately in the books of account are measured at fair value. Valuation is presented in the statement of financial position under ‘Derivative financial instruments’. Changes in the valuation of fair value of derivative instruments are recorded in the income statement under the item ‘Net income from financial instruments measured at fair value 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. 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 derivatives includes the Group’s own credit risk as well as counterparty credit risk. In case of derivative instruments adjustment of the valuation of derivatives reflecting counterparty credit risk CVA (credit value adjustment) and adjustment of the valuation of derivatives reflecting the Group's own credit risk DVA (debt value adjustment) is calculated. The process of calculation of CVA and DVA adjustments includes the selection of method determining the spread of the counterparty’s or the Group’s credit risk (e.g. a market price method based on the continuous price quotations of debt instruments issued by the counterparty, a method of spread implied from Credit Default Swap contracts), an estimation of the probability of default of the counterparty or the Group and the recovery rate, and calculation of the amount of CVA and DVA adjustments.

The valuation techniques used by the Group for non-option derivative instruments are based on yield curves based on available market data (deposit margins on interbank market, IRS quotations).

Financial information

DERIVATIVE FINANCIAL INSTRUMENTS31.12.201631.12.2015
 AssetsLiabilitiesAssetsLiabilities
     
Hedging instruments382.11 135.2508.7998.5
Other derivative instruments2 518.53 062.73 838.63 626.3
     
Total 2 900.6 4 197.9 4 347.3 4 624.8

TYPE OF CONTRACT31.12.201631.12.2015
 AssetsLiabilitiesAssetsLiabilities
     
IRS1 386.52 097.53 206.33 053.1
CIRS569.71 391.1472.41 210.2
FX Swap205.3164.0310.086.0
Options546.5436.8237.9177.5
FRA2.52.216.222.2
Forward176.7106.3104.572.6
Other13.4--3.2
     
Total 2 900.6 4 197.9 4 347.3 4 624.8

Nominal amounts of underlying instruments (both sale and purchase) as at 31.12.2016  
 up to 1 month1 - 3 months3 months - 1 year1 - 5 years over 5 yearsTotal
Currency transactions      
FX Swap 23 608.5 5 908.4 8 403.7 1 562.6 - 39 483.2
Purchase of currency11 818.22 962.24 213.4795.2-19 789.0
Sale of currency11 790.32 946.24 190.3767.4-19 694.2
FX forward 5 920.5 3 678.5 9 113.8 4 650.9 6.0 23 369.7
Purchase of currency2 971.81 832.44 553.62 296.56.011 660.3
Sale of currency2 948.71 846.14 560.22 354.4-11 709.4
Options 1 987.4 2 784.1 22 339.8 6 622.4 148.6 33 882.3
Purchase1 112.21 372.311 402.73 528.674.317 490.1
Sale875.21 411.810 937.13 093.874.316 392.2
Cross Currency (CIRS) 3 605.6 2 550.4 1 721.6 22 347.8 10 576.9 40 802.3
Purchase1 734.51 275.2860.810 687.16 507.621 065.2
Sale1 871.11 275.2860.811 660.74 069.319 737.1
Interest rate transactions - - - - - -
Interest Rate Swap (IRS) 5 974.2 18 136.7 121 272.2 164 764.6 37 809.6 347 957.3
Purchase2 987.19 068.460 636.182 382.318 904.8173 978.7
Sale2 987.19 068.360 636.182 382.318 904.8173 978.6
Forward Rate Agreement (FRA) - - 18 477.0 1 250.0 - 19 727.0
Purchase--7 087.0500.0-7 587.0
Sale--11 390.0750.0-12 140.0
Other transactions:      
Other (including options on stock indices) 2 093.8 1.2 400.0 6.9 - 2 501.9
Purchase7.90.3400.06.9-415.1
Sale2 085.90.9---2 086.8
Total derivative instruments 43 190.0 33 059.3 181 728.1 201 205.2 48 541.1 507 723.7

Nominal amounts of underlying instruments (both sale and purchase) as at 31.12.2015
 up to 1 month1 - 3 months3 months - 1 year1 - 5 years over 5 yearsTotal
Currency transactions      
FX Swap 31 379.5 10 782.6 7 271.3 2 218.1 - 51 651.5
Purchase of currency15 726.05 432.23 668.21 137.4-25 963.8
Sale of currency15 653.55 350.43 603.11 080.7-25 687.7
FX forward 4 674.7 2 128.6 5 855.3 3 353.3 - 16 011.9
Purchase of currency2 337.61 075.52 926.81 657.7-7 997.6
Sale of currency2 337.11 053.12 928.51 695.6-8 014.3
Options 2 026.6 3 215.5 10 167.3 8 121.4 154.0 23 684.8
Purchase1 088.01 787.25 413.24 123.477.012 488.8
Sale938.61 428.34 754.13 998.077.011 196.0
Cross Currency (CIRS) 1 719.7 169.0 1 899.4 25 454.3 12 779.3 42 021.7
Purchase797.384.5914.612 436.16 436.320 668.8
Sale922.484.5984.813 018.26 343.021 352.9
Interest rate transactions      
Interest Rate Swap (IRS) 17 405.8 44 348.8 82 712.8 225 911.4 41 427.2 411 806.0
Purchase8 702.922 174.541 356.8112 955.720 713.6205 903.5
Sale8 702.922 174.341 356.0112 955.720 713.6205 902.5
Forward Rate Agreement (FRA) 16 313.0 17 500.0 18 215.0 750.0 - 52 778.0
Purchase8 824.08 625.07 155.0750.0-25 354.0
Sale7 489.08 875.011 060.0--27 424.0
Other transactions:      
Other (including options on stock indices) 2 309.5 8.3 17.4 1.0 - 2 336.2
Purchase834.3-16.1--850.4
Sale1 475.28.31.31.0-1 485.8
Total derivative instruments 75 828.8 78 152.8 126 138.5 265 809.5 54 360.5 600 290.1

Calculation of estimates

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

Estimated change in valuation with parallel shift of yield curves:31.12.2016 31.12.2015 
 +50 b.p. scenario-50 b.p. scenario+50 b.p. scenario-50 b.p. scenario
     
IRS(119)121(34)34
CIRS(88)91(95)99
other derivatives(4)4(1)1
     
Total (211) 216 (130) 134

   

As at 31 December 2016 the amount of CVA and DVA adjustments amounted to PLN 7.4 million (as at 31 December 2015: PLN 2 million).