9 Financial assets designated
at fair value
10 Derivatives
Contents Introduction Management report Appendices Corporate governance Consolidated Financial Statements Company Financial Statements
in millions of euros
2017
2016
Debt securities
126
32
Loans
700
854
Venture capital (equity instrument)
333
314
Other equity instruments
35
121
Total
1,194
1,321
The change in the current year in the fair value of the loans
designated as being at fair value with adjustments in the
income statement that is allocable to the changes in the
credit risk amounts to 3 (2016:1The cumulative change
is -25 (2016: -28). Any changes in fair value are calculated by
discounting future cash flows. When setting the discount rate,
account is taken of expected losses, liquidity mark-ups and the
risk margin. No use is made of credit derivatives to hedge the
purchased loans designated at fair value.
Derivatives are used at Rabobank for the purpose of mitigating
at least a portion of the risks arising from the bank's various
operations. Examples of this include interest rate swaps used to
hedge interest rate risks arising from the difference in maturities
between assets and liabilities. Another example are cross-
currency swaps, which are used to hedge the currency risk to
which the bank is exposed after issuing debt instruments in
foreign currencies. In addition to hedging purposes derivatives
are also contracted with the bank's customers where Rabobank
is the counterparty.
10.1 Types of derivative instruments
used by Rabobank
Forward currency and interest rate contracts are contractual
obligations to receive or pay a net amount based on prevailing
exchange or interest rates, or to purchase or sell foreign
currency or a financial instrument on a future date at a fixed
specified price in an organised financial market. Since collateral
forforward contracts is provided in the form of cash, cash
equivalents or marketable securities, and changes in the value
of forward contracts are settled daily, mainly via a central
counterparty clearing house, the credit risk is low.The credit
risk exposure for Rabobank is represented by the potential
cost of replacing the swaps if the counterparties default.
The risk is monitored continuously against current fair value,
a portion of the notional amount of the contracts and the
liquidity in the markets. As part of the credit risk management
process, Rabobank employs the same methods for evaluating
counterparties as it does for evaluating its own lending activities.
Forward rate agreements are individually agreed forward
interest rate contracts under which the difference between
a contractually agreed interest rate and the market rate on
a future date has to be settled in cash, based on a notional
principal amount.
Currency and interest rate swaps are commitments to exchange
one set of cash flows for another. Swaps entail an economic
exchange of currencies or interest rates (such as a fixed rate
for one or more variable rates), or a combination (i.e. a cross-
currency interest rate swap). Except in certain currency swaps,
no transfer of the principal amount takes place.
Currency and interest rate options are contracts under which
the seller (known as the writer) gives the buyer (known as
the holder) the right, entailing no obligation, to purchase (in
the case of a call option) or sell (in the case of a put option)
a specific amount of foreign currency or a specific financial
instrument on or before an agreed date or during an agreed
period at a price set in advance. As consideration for accepting
the currency or interest rate risk, the writer receives a payment
(known as a premium) from the holder. Options are traded on
exchanges or between Rabobank and clients (OTC). Rabobank is
only exposed to credit risks as an option holder and only up to
the carrying amount, which is equivalent to the fair value.
Credit default swaps (CDSs) are instruments by means of which
the seller of a CDS undertakes to pay an amount to the buyer.
This amount is equal to the loss that would be incurred by
holding an underlying reference asset if a specific credit event
were to occur (i.e. the materialisation of a risk). The buyer is
under no obligation to hold the underlying reference asset.
The buyer pays the seller a credit protection fee largely
expressed in basis points, with the size of the fee depending on
the credit spread and tenor of the reference asset.
10.2 Derivatives issued or held for trading
The derivatives held or issued for trading are those used to
hedge economic risks but which do not qualify as hedge
accounting instruments and derivatives that corporate
customers have contracted with Rabobank to hedge interest
rate and currency risks.The exposures from derivatives
with corporate customers are normally hedged by entering
into offsetting positions with one or more professional
counterparties, within trading limits set.
10.3 Derivatives held as hedges
Rabobank contracts various financial derivatives that serve to
hedge economic risks, including interest rate and currency
risks, which qualify as a fair value hedge, cash flow hedge or net
investment hedge.
Rabobank Annual Report 2017 - Consolidated financial statements
214
