F.27. Hedge accounting

F.27.1. Foreign currency risk hedging

Starting 1 October 2008, hedge accounting is applied by the Company on foreign currency risk (FX risk). The Company uses fair value hedging.

The functional currency of the Company and the currency of its liabilities is CZK. However, in the investment portfolios, there are also instruments denominated in foreign currencies. According to the general policy, all these instruments are dynamically hedged into CZK via FX derivatives.

Foreign currency hedging is in place for all foreign currency investments, i.e. bonds, investment fund units, equities, etc. in order to fully hedge the implied FX risk. The process in place guarantees a high efficiency of the hedging relationship.

The FX difference on all financial assets and derivatives, except for equities classified in the available-for-sale portfolio, are reported in the profit or loss account according to IAS 39. FX revaluation on AFS equities is within the hedge accounting reported in the profit or loss account either as other income – gains on foreign currency or other expenses – losses on foreign currency.

Hedged items
Hedge accounting is applied to financial assets – defined as all non-derivative financial assets denominated in or exposed to foreign currencies (i.e. all bonds, equities, investment fund units, term deposits and current bank accounts denominated in EUR, USD and other currencies) except for:
a) financial assets backing unit-linked products;
b) other particular exclusions predefined by the investment management strategy.

Hedged items include financial assets classified in the available-for-sale category, fair value to profit or loss, other investments and cash and cash equivalents. The hedged items do not include financial liabilities.

Hedging instruments
Hedging instruments are defined as all FX derivatives except for options and part of the financial liabilities (sell-buy operations). The derivatives are designated as hedging instruments in its entirety.

Assets according to this definition can be clearly identified at any time. As at 31 December hedged items and hedging instruments were as follows:

XLS

Assessment of hedging effectiveness and possible adjustment of dynamic hedging strategy is performed by the Company on a monthly basis. In every month of 2016 and 2015 Company’s hedging was according to IFRS and internal rules governing hedge accounting evaluated as effective.

F.27.2. Interest rate risk hedging

Starting 1 July 2011 hedge accounting has been applied to derivatives hedging interest rate risk exposure of interest-bearing financial assets. The Company uses fair value hedging.

The Company has implemented a risk management strategy for interest rate risk. The objective of the investment and hedging strategy is to manage the overall interest rate risk position on a continuous basis. The Company achieves this objective by a dynamic strategy.

The change in the fair value of interest rated derivatives and FVTPL interest-bearing financial assets is reported in the profit or loss account according to IAS 39. Change in the fair value of AFS interest-bearing financial assets attributable to the interest rate risk is within the hedge accounting reported in the profit or loss account either as other income from financial instruments and other investments or other expenses for financial instruments and other investments.

Hedged items
The Company designates as the hedged item a group of fixed income instruments. Hedged items include financial assets classified in the available-for-sale category and fair value to profit or loss category. The hedged items do not include financial liabilities.

Hedging instruments
Hedging instruments are defined as a group of interest rate derivatives. The derivatives are designated as hedging instruments in their entirety.

Assets and derivatives according to this definition can be clearly identified at any time. As at 31 December hedged items and hedging instruments were as follows:

XLS

Assessment of hedging effectiveness and possible adjustment of dynamic hedging strategy is performed by the Company on a monthly basis. In every month of 2016 and 2015 Company’s hedging was according to IFRS and internal rules governing hedge accounting evaluated as effective.