Page 85 - Annual Report 2023

ANNUAL REPORT 2023 16
Notes to the Consolidated Financial Statements for the year ended 31 December 2023
(amounts in USD, unless otherwise stated)

adjusted for transaction costs unless the Group designated a financial liability at fair value through profit or loss.

Subsequently, financial liabilities are measured at amortised cost using the effective interest method except for derivatives and financial
liabilities designated at FVTPL, which are carried subsequently at fair value with gains or losses recognised in profit or loss (other than
derivative financial instruments that are designated and effective as hedging instruments). All interest-related charges and, if applicable,
changes in an instrument’s fair value that are reported in profit or loss are included within finance costs or finance income.

(xi) Derivative financial instruments and hedge accounting
The Group applies the new hedge accounting requirements in IFRS 9 prospectively.
Derivative financial instruments are accounted for at fair value through profit and loss (FVTPL) except for derivatives designated as
hedging instruments in cash flow hedge relationships, which require a specific accounting treatment. To qualify for hedge accounting,
the hedging relationship must meet all of the following requirements:
• there is an economic relationship between the hedged item and the hedging instrument
• the effect of credit risk does not dominate the value changes that result from that economic relationship
• the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually
hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item.
All derivative financial instruments used for hedge accounting are recognised initially at fair value and reported subsequently at fair
value in the statement of financial position. To the extent that the hedge is effective, changes in the fair value of derivatives designated
as hedging instruments in cash flow hedges are recognised in other comprehensive income and included within the cash flow hedge
reserve in equity. Any ineffectiveness in the hedge relationship is recognised immediately in profit or loss.
At the time the hedged item affects profit or loss, any gain or loss previously recognised in other comprehensive income is reclassified
from equity to profit or loss and presented as a reclassification adjustment within other comprehensive income. However, if a non-
financial asset or liability is recognised as a result of the hedged transaction, the gains and losses previously recognised in other
comprehensive income are included in the initial measurement of the hedged item. If a forecast transaction is no longer expected to
occur, any related gain or loss recognised in other comprehensive income is transferred immediately to profit or loss. If the hedging
relationship ceases to meet the effectiveness conditions, hedge accounting is discontinued and the related gain or loss is held in the
equity reserve until the forecast transaction occurs.

- Futures
The Bank enters into derivatives for trading and risk management purposes. Derivatives held for risk management purposes include
hedges that either meet the hedge accounting requirements or hedges that are economic hedges, but do not meet the hedge
accounting requirements.

As part of its asset and liability management, the Bank uses derivatives for economic hedging purposes in order to reduce its exposure
to market risks. This is achieved by hedging specific financial instruments, portfolios of fixed rate financial instruments and forecast
transactions, as well as hedging of aggregate financial position exposures. Where possible, the Bank applies hedge accounting.

The Bank has entered into financial derivatives through interest rate future contracts so as to hedge the price movement of its financial
assets measured at fair value to help prevent losses from unfavorable price changes. Concretely, the Bank has opened (sold) short
positions of long-term US Treasury Eurobond Futures for hedging the interest risk component of the USD denominated Eurobonds.
Similarly, the Bank has opened short positions of long-term European Sovereign Eurobond Futures (German, French, Italian and
Spanish) for hedging the interest risk component of the EUR denominated Eurobonds. The futures positions are accounted for at fair
value through profit and loss (FVTPL).

The table below shows the fair values of futures position together with their notional amounts. The notional amounts indicate the volume
of transactions outstanding at the year end and are not indicative of either the market or credit risk.