36.5. Methods for monitoring hedge effectiveness

Since the implementation of IFRS 9, the Volkswagen Group determines hedge effectiveness mainly on a prospective basis using the critical terms match method. Retrospective analysis of effectiveness uses effectiveness tests in the form of the dollar offset method. Under the dollar offset method, the changes in value of the hedged item expressed in monetary units are compared with the changes in value of the hedging instrument expressed in monetary units.

To this end, the accumulated changes in the fair value of the designated spot component of the hedging instrument and hedged item are compared. If the critical terms do not match, the same procedure is applied to the non-designated component.

For hedges involving interest rate or cross-currency swaps, the Volkswagen Group is exposed to uncertainty resulting from the IBOR reform, which may affect the timing, the amount of the IBOR-based cash flows, or the hedged risk of the hedged item or the hedging instrument. The Volkswagen Group applies the practical expedients allowed in connection with the amendments to the standard, irrespective of the remaining maturity of the hedged items and hedging instruments included in the hedges, to all hedges affected by the aforementioned uncertainty arising from the IBOR reform.

The uncertainty relates mainly to the following interest rate benchmarks: USD LIBOR, GBP LIBOR and CAD CDOR. In the case of fair value hedges, the uncertainty relates to the identifiability of the risk component which results from the change in the fair value used to hedge against risks of changes in the carrying amounts of financial assets and financial liabilities. In cash flow hedges used to hedge against risks arising from changes in future cash flows, the uncertainty relates to the highly probable requirement for hedged future variable cash flows. The expected impact of the IBOR reform is being assessed on an ongoing basis. Any measures required have already been initiated for certain interest rate benchmarks; for other interest rate benchmarks, they will be initiated in good time in the future. By adapting systems and processes, these measures are intended to ensure that new interest rate benchmarks can be rolled out to replace the interest rate benchmarks discontinued as a result of the IBOR reform in a timely manner.

NOTIONAL AMOUNT OF DERIVATIVES

The notional amounts of hedging instruments exposed to the uncertainty from the IBOR reform described above are €25,466 million (previous year: €35,389 million) in total. In the fiscal year, €12,617 million of this total was attributable to the USD LIBOR (previous year: €12,847 million), €9,147 million to the GBP LIBOR (previous year: €13,112 million), €3,620 million to the CAD CDOR (previous year: €3,990 million) and €82 million to the JPY LIBOR (previous year: €0 million). Compared with the previous year, we believe that the notional amounts of AUD BBSW and NOK OIBOR hedging instruments are no longer exposed to any uncertainty from the IBOR reform.

The summary below presents the remaining maturities profile of the notional amounts of the hedging instruments, which are accounted for under the Volkswagen Group’s hedge accounting rules, and of derivatives to which hedge accounting is not applied:

NOTIONAL AMOUNT OF DERIVATIVES

 

 

REMAINING TERM

 

TOTAL NOTIONAL AMOUNT

 

TOTAL NOTIONAL AMOUNT

€ million

 

up to one year

 

within one to five years

 

more than five years

 

Dec. 31, 2020

 

Dec. 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Notional amount of hedging instruments within hedge accounting

 

 

 

 

 

 

 

 

 

 

Hedging interest rate risk

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

18,225

 

38,981

 

4,626

 

61,832

 

69,460

Hedging currency risk

 

 

 

 

 

 

 

 

 

 

Currency forwards/Cross-currency swaps

 

 

 

 

 

 

 

 

 

 

Currency forwards/Cross-currency swaps in CNY

 

5,217

 

1,051

 

 

6,268

 

10,869

Currency forwards/Cross-currency swaps in GBP

 

10,526

 

6,656

 

 

17,182

 

25,153

Currency forwards/Cross-currency swaps in USD

 

12,411

 

16,404

 

3,501

 

32,316

 

23,965

Currency forwards/Cross-currency swaps in other currencies

 

18,607

 

16,922

 

 

35,529

 

34,091

Currency options

 

 

 

 

 

 

 

 

 

 

Currency options in USD

 

2,297

 

6,452

 

 

8,749

 

8,755

Currency options in CNY

 

3,986

 

 

 

3,986

 

2,047

Currency options in other currencies

 

2,123

 

4,164

 

 

6,287

 

4,395

Combined interest rate and currency risk hedging

 

 

 

 

 

 

 

 

 

 

Cross-currency interest rate swaps

 

1,138

 

517

 

 

1,655

 

2,228

 

 

 

 

 

 

 

 

 

 

 

Notional amount of other derivatives

 

 

 

 

 

 

 

 

 

 

Hedging Interest rate risk

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

20,308

 

36,174

 

17,996

 

74,478

 

70,852

Hedging Currency risk

 

 

 

 

 

 

 

 

 

 

Currency forwards/Cross-currency swaps

 

 

 

 

 

 

 

 

 

 

Currency forwards/Cross-currency swaps in USD

 

6,636

 

4,479

 

608

 

11,722

 

11,498

Currency forwards/Cross-currency swaps in other currencies

 

13,654

 

1,291

 

32

 

14,977

 

21,105

Currency options

 

 

 

 

 

 

 

 

 

 

Currency options in USD

 

82

 

 

 

82

 

188

Currency options in other currencies

 

41

 

 

 

41

 

487

Combined interest rate and currency risk hedging

 

 

 

 

 

 

 

 

 

 

Cross-currency interest rate swaps

 

3,870

 

8,088

 

2,542

 

14,501

 

13,499

Hedging Commodity price risk

 

 

 

 

 

 

 

 

 

 

Forward commodity contracts (aluminum)

 

1,001

 

2,099

 

 

3,099

 

3,041

Forward commodity contracts (copper)

 

333

 

604

 

 

938

 

956

Forward commodity contracts (nickel)

 

267

 

1,451

 

608

 

2,326

 

2,075

Forward commodity contracts (other)

 

96

 

47

 

 

143

 

188

Both derivatives closed with offsetting transactions and the offsetting transactions themselves are included in the respective notional amount. The offsetting transactions cancel out the effects of the original hedging transactions. If the offsetting transactions were not included, the respective notional amount would be significantly lower. In addition to the derivatives used for hedging foreign currency, interest rate and price risk, the Group held options and other derivatives on equity instruments at the reporting date, mainly in connection with fund investments. The notional volume with a remaining maturity of less than one year was €10.4 billion (previous year: €18.2 billion), and the notional volume with a remaining maturity of more than one year amounted to €0.2 billion (previous year: €– billion).

Also in connection with fund investments, the Group held credit default swaps with a notional amount of €36.6 billion (previous year: €30.6 billion).

Existing cash flow hedges in the notional amount of €2.1 billion (previous year: €0.2 billion) were discontinued because of a reduction in the projections. In addition, hedges were to be terminated due to internal risk regulations.

Items hedged under cash flow hedges are expected to be realized in accordance with the maturity buckets of the hedges reported in the table. For cash flow hedges, the Volkswagen Group achieved an average hedging interest rate of 0.72% for hedging interest rate risk. In addition, currency risk was hedged at the following hedging exchange rates for the major currency pairs: EUR/USD at 1.19; EUR/GBP at 0.89; EUR/CNY at 8.02.

The fair values of the derivatives are estimated using market data at the balance sheet date as well as by appropriate valuation techniques. The following term structures were used for the calculation:

in %

 

EUR

 

CAD

 

CHF

 

CNY

 

CZK

 

GBP

 

JPY

 

SEK

 

USD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate for six months

 

−0.4707

 

0.4178

 

−0.7357

 

2.8501

 

0.4538

 

0.0147

 

−0.1458

 

0.0495

 

0.1818

Interest rate for one year

 

−0.5150

 

0.4386

 

−0.7293

 

2.9022

 

0.5548

 

−0.0131

 

−0.0958

 

0.0034

 

0.1821

Interest rate for five years

 

−0.4645

 

0.8320

 

−0.5610

 

3.3500

 

1.1150

 

0.1926

 

−0.0375

 

0.1325

 

0.4300

Interest rate for ten years

 

−0.2650

 

1.2375

 

−0.2875

 

4.0700

 

1.2850

 

0.3966

 

0.0513

 

0.3880

 

0.9240