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34.2. Types of hedging strategies

Annual Report 2019 > 34.2. Types of hedging strategies
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34.2.1.  Fair value hedges

Changes in the fair value measurement of financial instruments designated as hedged items are recognized, in the part related to the hedged risk, in the profit and loss account. The remaining part of changes in the carrying amount are recognized in accordance with the general rules applicable to a given class of financial instruments.
Changes in the fair value measurement of derivatives designated as hedges in hedge accounting are recognized in full in profit or loss, in the same line item where the effect of changes in the measurement of the hedged item are recognized.
The PZU Group ceases to apply hedge accounting if the hedging instrument expires or is sold, terminated or exercised (for this purpose, the replacement or rollover of a hedging instrument into another hedging instrument is not an expiration or termination if such replacement or rollover is part of the hedging strategy), if the hedge no longer meets the hedge accounting criteria or the hedging designation is revoked.
Adjustment for hedged risk on the hedged interest item is amortized to profit and loss no later than at the moment when hedge accounting is discontinued.
The main identified potential sources of inefficiencies in fair value hedges include:

  • impact of counterparty credit risk and own credit risk on the fair value of hedging transactions which is not reflected in the fair value of the hedged item,
  • differences between the maturities of IRS transactions and the maturities of debt securities,
  • differences in the level of interest coupons generated by the hedged item and hedging instruments.

Fair value hedge of fixed-coupon debt securities denominated in PLN, EUR and USD


Pekao hedges some of its interest rate risk associated with a change in the fair value of the hedged item caused by volatility of market interest rates through IRS transactions. This is the way to hedge the interest rate risk component arising from changes in the fair value of the hedged item caused only by volatility of market interest rates (WIBOR, EURIBOR, LIBOR USD). The hedged risk component was responsible in the past for a significant part of the changes in the fair value of the hedged item.

The table presents nominal values and interest rate of hedging instruments

  Cur-rency 31 December 2019 Maturity 31 December 2018 Maturity
    Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total
Par value PLN - - 280 200 480 - - 280 200 480
Average interest rate of the fixed-rate part   - - 1.8 1.8 1.8 - - 1.8 1.8 1.8
Par value EUR - 471 605 628 1,704 262 - 884 836 1,982
Average interest rate of the fixed-rate part   - 1.2 0.4 (0.1) 0.4 0.2 - 0.9 0.1 0.5
Par value USD - - 637 114 751 - 128 244 499 871
Average interest rate of the fixed-rate part   - - 3.7 2.0 3.5 - 6.9 4.9 3.7 4.5
Total   - 471 1,522 942 2,935 262 128 1,408 1,535 3,333
 
Impact of the hedge relationship on the statement of financial position and the financial result 31 December 2019 31 December 2018
  Hedges of securities measured at Total Hedges of securities measured at Total
  amortized cost fair value   amortized cost fair value  
Hedging instruments
Par value 200 2,735 2,935 200 3,133 3,333
Carrying amount – assets - 1 1 - 21 21
Carrying amount – liabilities 15 146 161 10 134 144
Change in the fair value of the hedging instrument, on the basis of which hedge inefficiency is estimated (6) (37) (43) (8) 49 41
Hedge inefficiency amount recognized in the profit and loss account - (1) (1) - 3 3
Hedged items
Carrying amount – assets 214 2,973 3,187 208 3,336 3,544
Accumulated adjustment to fair value of the hedged item included in the carrying amount of the hedged item recognized in the balance sheet – assets 14 175 189 9 125 134
Change in value of the hedged item used as the basis for estimating hedge inefficiency 5 36 41 8 (46) (38)
Accumulated adjustment to fair value of a hedged item remaining in the balance sheet, for those hedged items for which the balance sheet item is no longer adjusted to fair value - - - - - -

Fair value hedge of fixed-coupon debt securities


Alior Bank hedges the risk of changes in the fair value through other comprehensive income of purchased fixed-rate debt securities measured at fair value through other comprehensive income on account of changes in the interest rate swap curve. As part of this strategy Alior Bank establishes hedging relationships in which the fixed-coupon debt securities denominated in the given currency are the hedged instrument and interest rate swaps (IRS) in the same currency are the hedging instrument. Under this strategy Alior Bank hedges the risk following from changes in the interest rate swap curve (risk of volatility of market swap interest rates) excluding other effects changing the valuation (including asset swap spread).

The table presents nominal values and interest rate of hedging instruments

  Curr-ency 31 December 2019 Maturity 31 December 2018 Maturity
    Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total
Par value EUR - - - 13 13 - - - - -
Average interest rate of the fixed-rate part   - - - 0.7 0.7 - - - - -
Total   - - - 13 13 - - - - -
 
Impact of the hedge relationship on the statement of financial position and the financial result 31 December 2019 31 December 2018
Hedging instruments
Par value 13 -
Carrying amount – assets - -
Carrying amount – liabilities - -
Change in the fair value of the hedging instrument, on the basis of which hedge inefficiency is estimated - -
Hedge inefficiency amount recognized in the profit and loss account - -
Hedged items
Carrying amount – assets 14 -
Accumulated adjustment to fair value of the hedged item included in the carrying amount of the hedged item recognized in the balance sheet – assets - -
Change in value of the hedged item used as the basis for estimating hedge inefficiency - -
Accumulated adjustment to fair value of a hedged item remaining in the balance sheet, for those hedged items for which the balance sheet item is no longer adjusted to fair value - -

34.2.2.  Cash flow hedges

Cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognized asset or liability or a highly probable planned transaction and could affect profit or loss.
The result of measurement of the effective part of cash flow hedges is recognized in other comprehensive income. The ineffective part of the hedge is recognized in profit or loss.
Where the interest rate risk and currency risk are hedged in’s credit and deposit portfolios, the approach to managing these portfolios allows new transactions to be added to the hedge relationship or transactions to be removed following repayment or transfer to non-performing items. As a result, the exposure of these portfolios to interest rate risk and currency risk changes constantly. Since the age structure of the portfolios changes frequently, the hedged items are designated dynamically and the hedging items are allowed to adjust to these changes.

In cash flow hedge relationships, the main identified potential sources of inefficiencies include:

  • the impact of counterparty credit risk and own credit risk on the fair value of hedging instruments, i.e. interest rate swaps (IRSs), basis swaps and FX swaps, which is not reflected in the fair value of the hedged item,
  • differences between the frequencies of restatement of hedging instruments and hedged loans and deposits.

34.2.2.1.  Hedging of the portfolio of loan receivables from clients and variable-interest securities denominated in PLN

Pekao hedges its interest rate risks associated with the volatility of market reference rates (WIBOR) generated by the portfolio of loan receivables from clients and variable-interest securities denominated in PLN, by using interest rate swaps (IRS).

 

31 December 2018 Curr-ency 31 December 2019 Maturity 31 December 2018 Maturity
    Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total
Par value PLN 600 1,400 7,000 3,200 12,200 1,400 200 2,800 4,200 8,600
Average interest rate of the fixed-rate part   3.9 3.6 2.3 2.0 2.4 3.7 3.5 3.4 2.6 3.0
 
Impact of the hedge relationship on the statement of financial position and the financial result 31 December 2019 31 December 2018
Hedging instruments    
Par value 12,200 8,600
Carrying amount – assets 290 262
Carrying amount – liabilities 8 -
Change in the fair value of the hedging instrument, on the basis of which hedge inefficiency is estimated 50 (102)
Profit or loss arising out of net position hedge, captured in a separate line item of other comprehensive income - -
Hedge inefficiency amount recognized in the profit and loss account (1) -
Amount transferred from cash flow hedge accounting capital to the profit and loss account as reclassification adjustment - -
Hedged items    
Amount equal to the change in the fair value of a hypothetical derivative representing the hedged item, which forms the basis for estimating hedge inefficiency in the period (50) 102
Balance of the hedge accounting capital item for relations, for which hedge accounting will be continued after the end of the reporting period 201 150
Balance remaining in the hedge accounting capital item for those relations, to which hedge accounting is no longer applied - -
 

34.2.2.2.  Hedging of the deposit portfolio in the Polish zloty and in the Euro

Pekao hedges its interest rate risk associated with the volatility of market reference rates (WIBOR, EURIBOR) generated by the portfolios of deposits denominated in the Polish zloty and the Euro, which are economically equivalent to a long-term liability with variable interest rate, by using interest rate swaps (IRS).

 

  Curr-ency 31 December 2019 Maturity 31 December 2018 Maturity
    Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total
Par value PLN - 47 215 289 551 - - 242 207 449
Average interest rate of the fixed-rate part   - 1.8 1.8 1.9 1.9 - - 1.8 1.8 1.8
Par value EUR - 29 624 - 653 - - 659 - 659
Average interest rate of the fixed-rate part   - (0.4) (0.4) - (0.4) - - (0.3) - (0.3)
   
Impact of the hedge relationship on the statement of financial position and the financial result 31 December 2019 31 December 2018
Hedging instruments    
Par value 1,204 1,108
Carrying amount – assets 3 -
Carrying amount – liabilities 29 16
Change in the fair value of the hedging instrument, on the basis of which hedge inefficiency is estimated (11) (11)
Profit or loss arising out of net position hedge, captured in a separate line item of other comprehensive income - -
Hedge inefficiency amount recognized in the profit and loss account - -
Amount transferred from cash flow hedge accounting capital to the profit and loss account as reclassification adjustment - -
Hedged items    
Amount equal to the change in the fair value of a hypothetical derivative representing the hedged item, which forms the basis for estimating hedge inefficiency in the period 11 11
Balance of the hedge accounting capital item for relations, for which hedge accounting will be continued after the end of the reporting period (22) (12)
Balance remaining in the hedge accounting capital item for those relations, to which hedge accounting is no longer applied - -

34.2.2.3.  Hedging for a variable interest rate loan portfolio in Swiss francs and a deposit portfolio in Polish zloty

Pekao hedges its exposure to interest rate risk associated with the volatility of market reference rates (WIBOR, LIBOR CHF) and its exposure to currency risk generated by portfolios of variable interest rate loans denominated in Swiss francs and deposits in Polish zloty, which are economically equivalent to long-term variable interest rate liabilities, by using cross currency basis swaps. CIRS transactions are decomposed into a component hedging the asset portfolio and a component hedging the liability portfolio.

 

  Curr-ency 31 December 2019 Maturity 31 December 2018 Maturity
    Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total
Par value CHF/PLN - 274 863 1,541 2,678 - 3,759 916 1,691 6,366
 
Impact of the hedge relationship on the statement of financial position and the financial result 31 December 2019 31 December 2018
Hedging instruments    
Par value 2,678 6,366
Carrying amount – assets - -
Carrying amount – liabilities 391 745
Change in the fair value of the hedging instrument, on the basis of which hedge inefficiency is estimated 32 9
Profit or loss arising out of net position hedge, captured in a separate line item of other comprehensive income - -
Hedge inefficiency amount recognized in the profit and loss account - -
Amount transferred from cash flow hedge accounting capital to the profit and loss account as reclassification adjustment - -
Hedged items    
Amount equal to the change in the fair value of a hypothetical derivative representing the hedged item, which forms the basis for estimating hedge inefficiency in the period (49) (13)
Balance of the hedge accounting capital item for relations, for which hedge accounting will be continued after the end of the reporting period (54) (86)
Balance remaining in the hedge accounting capital item for those relations, to which hedge accounting is no longer applied - -

34.2.2.4.   Hedging of a portfolio of variable interest rate loans in EUR and term and negotiated deposits in USD

Pekao hedges its exposure to interest rate risk associated with the volatility of market reference rates (EURIBOR, LIBO USD) and its exposure to currency risk generated by portfolios of variable interest rate loans denominated in the Euro and term and negotiated deposits in the American dollar, which are economically equivalent to long-term variable interest rate liabilities, by using FX swaps.

As of 1 January 2019, the PZU Group established a new relationships, analogous to the existing one, which hedges only the foreign exchange risk. The new relationship covers all FX Swap transactions designated for hedge accounting after 31 March 2019. The existing relationship should expire by February 2020. The new relationship differs from the existing one in terms of its assessment of the inefficiencies due to a different structure of the hypothetical derivative. Due to the similarity of the hedged items and type of the hedging transactions and insignificance of the differences in the inefficiency amounts, the two relationships were presented jointly.

 

  Curr-ency 31 December 2019 Maturity 31 December 2018 Maturity
    Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total
Par value EUR/PLN 1,996 1,300 - - 3,296 1,634 688 - - 2,322
Average rate   4.4 4.4 - - 4.4 4.3 4.4 - - 4.4
Par value EUR/USD 1,022 681 - - 1,703 804 - - - 804
Average rate   1.1 1.2 - - 1.1 1.2 - - - 1.2
Par value USD/PLN 95 569 - - 664 - - - - -
Average rate   3.9 3.9 - - 3.9 - - - - -
 
Impact of the hedge relationship on the statement of financial position and the financial result 31 December 2019 31 December 2018
Hedging instruments    
Par value 5,663 3,126
Carrying amount – assets 83 31
Carrying amount – liabilities 25 1
Change in the fair value of the hedging instrument, on the basis of which hedge inefficiency is estimated 2 -
Profit or loss arising out of net position hedge, captured in a separate line item of other comprehensive income - -
Hedge inefficiency amount recognized in the profit and loss account - -
Amount transferred from cash flow hedge accounting capital to the profit and loss account as reclassification adjustment - -
Hedged items    
Amount equal to the change in the fair value of a hypothetical derivative representing the hedged item, which forms the basis for estimating hedge inefficiency in the period (2) -
Balance of the hedge accounting capital item for relations, for which hedge accounting will be continued after the end of the reporting period 2 -
Balance remaining in the hedge accounting capital item for those relations, to which hedge accounting is no longer applied - -
   

34.2.2.5.  Hedging of a portfolio of variable interest rate loans and subordinated bonds

Alior Bank hedges its interest rate risk associated with the volatility of market reference rates (WIBOR) generated by the portfolio of loans and subordinated bonds denominated in the Polish zloty, by using interest rate swaps (IRS).

  Curr-ency 31 December 2019 Maturity 31 December 2018 Maturity
    Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total
Par value PLN 168 2,244 7,272 222 9,906 1,750 275 5,719 225 7,969
Average interest rate of the fixed-rate part   1.8 2.0 2.0 1.8 2.0 1.80 2.74 2.13 2.84 2.10
Par value EUR - - 43 - 43 - - - - -
Average interest rate of the fixed-rate part   - - (0.1) - (0.1) - - - - -
 
Impact of the hedge relationship on the statement of financial position and the financial result 31 December 2019 31 December 2018
Hedging instruments    
Par value 9,949 7,969
Carrying amount – assets 135 112
Carrying amount – liabilities 41 9
Change in the fair value of the hedging instrument, on the basis of which hedge inefficiency is estimated 61 28
Profit or loss arising out of net position hedge, captured in a separate line item of other comprehensive income 40 27
Hedge inefficiency amount recognized in the profit and loss account 1 1
Amount transferred from cash flow hedge accounting capital to the profit and loss account as reclassification adjustment (25) 15
Hedged items    
Amount equal to the change in the fair value of a hypothetical derivative representing the hedged item, which forms the basis for estimating hedge inefficiency in the period (57) (50)
Balance of the hedge accounting capital item for relations, for which hedge accounting will be continued after the end of the reporting period 15 31
Balance remaining in the hedge accounting capital item for those relations, to which hedge accounting is no longer applied - -
   

34.2.2.6.  Hedging of a portfolio of fixed-rate bonds denominated in EUR, USD or GBP

PZU hedges foreign currency cash flows generated by the portfolios of fixed-rate bonds denominated in EUR, USD or GBP using cross-currency interest rate swaps (CIRS). This way it hedges the foreign exchange risk component associated with the volatility of exchange rates.

 

  Curr-ency 31 December 2019 Maturity 31 December 2018 Maturity
    Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total Up to 3 months Over 3 months up to 1 year Over 1 year to 5 years Over 5 years Total
Par value EUR/PLN - - 288 966 1,254 - - - - -
Average rate   - - 1.3 2.1 1.9 - - - - -
Par value USD /PLN - - 65 380 445 - - - - -
Average rate   - - 4.8 4.7 4.7 - - - - -
Par value GBP /PLN - - 15 594 609 - - - - -
Average rate   - - 3.1 4.4 4.4 - - - - -
 
Impact of the hedge relationship on the statement of financial position and the financial result 31 December 2019 31 December 2018
Hedging instruments    
Par value 2,308 -
Carrying amount – assets 31 -
Carrying amount – liabilities 10 -
Change in the fair value of the hedging instrument, on the basis of which hedge inefficiency is estimated 21 -
Profit or loss arising out of net position hedge, captured in a separate line item of other comprehensive income 13 -
Hedge inefficiency amount recognized in the profit and loss account (10) -
Amount transferred from cash flow hedge accounting capital to the profit and loss account as reclassification adjustment 18 -
Hedged items    
Amount equal to the change in the fair value of a hypothetical derivative representing the hedged item, which forms the basis for estimating hedge inefficiency in the period (31) -
Balance of the hedge accounting capital item for relations, for which hedge accounting will be continued after the end of the reporting period 13 -
Balance remaining in the hedge accounting capital item for those relations, to which hedge accounting is no longer applied - -