17) Derivative hedging instruments

The Group as at the end of 2014 uses the following types of hedge accounting:

1. Hedge of the fair value of the portfolio of fixed rate FX liabilities and FX receivables portfolio of floating rate;
2. Hedge of volatility of the cash flows generated by the portfolio of PLN mortgage loans;
3. Hedge of volatility of the cash flows generated ­­­­­­­­­­­­­­­­by the portfolio of FX mortgage loans and the PLN deposits financing them;
4. Cash flow volatility hedge for the flows generated by future revenues and expenditures denominated in foreign currency

Starting from 1 January 2006 the Group established first formal hedging relationship against cash flow volatility. One should note that as from IFRS implementation, pursuant to IAS 39 the effect of valuation of all derivatives not classified as and not being effective hedges is presented in result from financial instruments valued at fair value through the profit and loss account. The employment of such methodology resulted in the lack of coherence in the manner of presentation of financial instruments in the profit and loss account.  Net interest income from derivative transactions concluded in order to hedge FX liquidity from the economic point of view constitutes an interest margin component (allows to adjust interest income from FX loans to the cost of funding resulting from the zloty deposit portfolio). Implementation of formal hedge accounting permitted presentation of the transactions in the Profit and Loss Account in accordance with their economic meaning.

At the end of each month the Bank performs an assessment of effectiveness of the hedge used by analysing changes of fair value of the hedged instrument and the hedging instrument.

As at the end of 2014 the Group continued to apply hedge accounting for following transactions:

During 2013, the Group applied, and then ceased the hedging relationship in terms of volatility of cash flows generated by a portfolio of floating-rate mortgage loans with using FX swaps as a hedging instrument.

17a. Hedge accounting

Adjustment to fair value of hedged items due to hedged risk for active hedging relationships, for the year 2014 amounted to PLN 1,117 thousand, of which PLN 4,568 thousand related to hedged assets, and PLN 3,451 thousand  related to hedged liabilities.

Adjustment to fair value of hedged items due to hedged risk for active hedging relationships, for the year 2013 amounted to PLN -2,432 thousand, of which PLN 8,875 thousand related to hedged assets, and PLN 11,307 thousand  related to hedged liabilities.

17b. Hedge accounting for cash flows

Ineffective part of valuation of hedging instrument recognised in Profit and loss account for 2014 amounted to PLN – 9.95 million (respectively in 2013 amounted to PLN -9,60 million).