In its operations, the Group uses derivative financial instruments for risk management purposes related to its operations. The Group most often uses the following derivative instruments: IRS, CIRS, FX Swap, options, commodity swap, FRA, Forward and Futures. Derivative financial instruments are stated at fair value from the transaction date. Every derivative with positive fair value is shown under “Other derivative financial instruments” as an asset, and if the fair value is negative – as a liability.
The Group recognizes changes to the fair value measurement of derivative instruments which are not classified as hedging instruments and the gain/(loss) on the settlement of those instruments in the net gain/(loss) on financial instruments or net foreign exchange gains/(losses), depending on the type of derivative.
Estimates and judgments
The fair value of derivative instruments other than options is designated using the measurement methods that base on discounted cash flows which may be obtained from a given financial instrument. The measurement techniques for financial instruments other than options are based on yield curves constructed on the basis of available market data (deposit rates on the interbank market, quotations of IRS transactions). 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 the selection of the methods for 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 implied spread from Credit Default Swap contracts), estimating the probability of the counterparty’s or the Group’s default and the recovery rate, as well as the calculation of CVA and DVA adjustments.