20. Derivative financial instruments

The Group uses the following derivative instruments for economic hedging and for other purposes:

Forward currency transactions represent commitments to purchase foreign and local currencies, including outstanding spot transactions. Futures for currencies and interest rates are contractual commitments to receive or pay a specific net value, depending on currency rate of exchange or interest rate variations, or to buy or sell a foreign currency or a financial instrument on a specified future date for a fixed price established on the organised financial market. Because futures contracts are collateralised with fair-valued cash or securities and the changes of the face value of such contracts are accounted for daily in reference to stock exchange quotations, the credit risk is marginal. FRA contracts are similar to futures except that each FRA is negotiated individually and each requires payment on a specific future date of the difference between the interest rate set in the agreement and the current market rate on the basis of theoretical amount of capital.

Currency and interest rate swap contracts are commitments to exchange one cash flow for another cash flow. Such a transaction results in swap of currencies or interest rates (e.g., fixed to variable interest rate) or combination of all these factors (e.g., cross-currency CIRS). With the exception of specific currency swap contracts, such transactions do not result in swaps of capital. The credit risk of the Group consists of the potential cost of replacing swap contracts if the parties fail to discharge their liabilities. This risk is monitored daily by reference to the current fair value, proportion of the face value of the contracts and market liquidity. The Group evaluates the parties to such contracts using the same methods as for its credit business, to control the level of its credit exposure.

The Group applies fair value hedge accounting for a part of the portfolio of fixed interest rate mortgage loans granted by the foreign branch of the Bank in the Czech Republic, fixed interest rate Eurobonds issued by mFinance France S.A.,a subsidiary of mBank, fixed interest rate mortgage bonds issued by mBank Hipoteczny, a subsidiary of mBank, as well as cash flow hedge accounting of variable rate loans indexed to market rates, granted by the Bank. Hedging instrument in both types of hedge accounting are fix to float Interest Rate Swap.

Detailed information on hedge accounting are presented in Note 21 below.

Currency and interest rate options are agreements, pursuant to which the selling party grants the buying party the right, but not an obligation, to purchase (call option) or sell (put option) a specific quantity of a foreign currency or a financial instrument at a predefined price on or by a specific date or within an agreed period. In return for accepting currency or interest rate risk, the buyer offers the seller a premium. An option can be either a public instrument traded at a stock exchange or a private instrument negotiated between the Group and a customer (private transaction). The Group is exposed to credit risk related to purchased options only up to the balance sheet value of such options, i.e. the fair value of the options.

Market risk transactions include futures contracts as well as commodity options, stock options and index options.

Face values of certain types of financial instruments provide a basis for comparing them to instruments disclosed in the statement of financial position but they may not be indicative of the value of the future cash flows or of the present fair value of such instruments. For this reason, the face values do not indicate the level of the Group's exposure to credit risk or price change risk. Derivative instruments can have positive value (assets) or negative value (liabilities), depending on market interest or currency exchange rate fluctuations. The aggregate fair value of derivative financial instruments may be subject to strong variations.

The following table presents the fair values of the derivatives:

 

 
        Contract amount         Fair value 
Purchase Disposal Assets Liabilities
As at 31 December 2014
Derivatives held for trading        
Foreign exchange derivatives        
- Currency forwards 17 780 971 17 711 933 172 061 38 397
- Currency swaps 12 180 402 12 276 709 45 073 162 466
- Cross-currency interest rate swap 4 723 072 4 760 397 12 290 57 389
- OTC currency options bought and sold 2 910 254 2 807 456 56 775 48 286
Total OTC derivatives 37 594 699 37 556 495 286 199 306 538
- Currency futures 139 953 141 615 - -
Total foreign exchange derivatives 37 734 652 37 698 110 286 199 306 538
Interest rate derivatives        
- Interest rate swap, OIS 254 956 265 254 956 265 4 264 152 4 260 275
- Forward rate agreements 66 775 000 81 157 400 147 744 123 087
- OTC interest rate options 341 659 374 641 3 981 4 059
Total OTC interest rate derivatives 322 072 924 336 488 306 4 415 877 4 387 421
- Interest rate futures 2 664 295 171 - -
Total interest rate derivatives 322 075 588 336 783 477 4 415 877 4 387 421
Market risk transactions 716 656 653 246 9 048 20 815
         
Total derivative assets / liabilities held for trading 360 526 896 375 134 833 4 711 124 4 714 774
Derivatives held for hedging        
Derivatives designated as fair value hedges 7 217 658 7 217 658 102 226 3 592
- Interest rate swaps 7 217 658 7 217 658 102 226 3 592
Derivatives designated as cash flow hedges 2 040 000 2 040 000 52 167 690
- Interest rate swaps 2 040 000 2 040 000 52 167 690
Total derivatives held for hedging 9 257 658 9 257 658 154 393 4 282
Total recognised derivative assets/ liabilities 369 784 554 384 392 491 4 865 517 4 719 056
         
Short-term (up to 1 year) 188 488 877 201 319 549 1 001 243 973 957
Long-term (over 1 year) 181 295 677 183 072 942 3 864 274 3 745 099
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             Contract amount          Fair value
Purchase Disposal Assets Liabilities
As at 31 December 2013
Derivatives held for trading        
Foreign exchange derivatives        
- Currency forwards 8 434 192 8 503 882 33 158 98 114
- Currency swaps 8 055 578 7 952 942 120 168 26 676
- Cross-currency interest rate swaps 2 207 359 2 204 651 24 041 17 232
- OTC currency options bought and sold 2 352 502 2 506 977 55 409 41 621
Total OTC derivatives 21 049 631 21 168 452 232 776 183 643
- Currency futures 60 449 60 728 - -
Total foreign exchange derivatives 21 110 080 21 229 180 232 776 183 643
Interest rate derivatives        
- Interest rate swap, OIS 182 875 031 182 875 028 1 976 546 2 133 359
- Forward rate agreements 97 450 000 89 025 000 121 700 115 818
- OTC interest rate options 428 843 453 606 4 788 4 373
Total OTC interest rate derivatives 280 753 874 272 353 634 2 103 034 2 253 550
- Interest rate futures 10 335 10 373 - -
Total interest rate derivatives 280 764 209 272 364 007 2 103 034 2 253 550
Market risk transactions 745 284 727 958 13 775 14 766
         
Total derivative assets / liabilities held for trading 302 619 573 294 321 145 2 349 585 2 451 959
Derivatives held for hedging        
Derivatives designated as fair value hedges 2 869 300 2 869 300 - 7 756
- Interest rate swaps 2 869 300 2 869 300 - 7 756
Total derivatives held for hedging 2 869 300 2 869 300 - 7 756
Total recognised derivative assets/ liabilities 305 488 873 297 190 445 2 349 585 2 459 715
         
Short-term (up to 1 year) 167 797 967 160 542 697 1 029 709 1 134 139
Long-term (over 1 year) 137 690 906 136 647 748 1 319 876 1 325 576
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In both reporting periods, market risk transactions comprise the fair values of: stock index options, shares and other equity securities, futures for commodities, swap contracts for commodities.

Under financial derivative instruments the Group presented derivative instruments in the amount of PLN 1 238 thousand (liabilities), which have been separated from the structured investment deposits (31 December 2013: PLN 1 223 thousand).

As at 31 December 2014 and 31 December 2013, the Group did not have any financial assets and liabilities designated upon initial recognition as at fair value through the income statement.