Page 79 - Annual Report 2022

17 Banka Kombëtare Tregtare Annual Report 2022

Banka Kombëtare Tregtare Sh.a.
Notes to the Consolidated Financial Statements for the year ended
31 December 2022 (Amounts in USD, unless otherwise stated)

3. Significant accounting policies (continued)
(g) Financial assets and liabilities (continued)

(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.