Valuation
Castellum uses interest rate derivatives for such purposes as managing interest rate risk and achieving the desired interest rate maturity structure. This strategy means that there may be changes in value of the interest rate derivatives portfolio from time to time. In addition, Castellum uses currency derivatives in order to hedge investments in Denmark and Finland as well as to manage currency risk and adjust its interest rate structure linked with borrowing in the international capital market. These also give rise to change in value which are included in the derivative portfolio’s market value.
To calculate the fair value of derivatives, market rates for each term and exchange rates as quoted in the market for the closing date are used. Interest rate swaps are valued by discounting future cash flows to present value, while instruments containing options are valued at current repurchase price. When calculating the fair value of derivatives, adjustments are made for counterparty risk in the form of Credit Value Adjustments (CVA) and Debt Value Adjustments (DVA). CVA shows Castellum’s risk of experiencing credit loss in the event of counterparty default, whereas DVA shows the opposite. The adjustment is calculated at the counterparty level based on expected future credit exposure, risk of default and the recovery rate of exposed credits. As of December 31, 2019, the market value of the interest rate and currency derivatives portfolio amounted to MSEK -715 (-716) where fair value is established according to level 2, IFRS 13.
In the balance sheet, derivatives are accounted for as long-term liabilities since the amount will not be settled in cash. A theoretically maturing amount during 2020, however, can be estimated at MSEK 149.
Counterparty risk
In order to limit counterparty risk, Castellum’s derivative contracts are covered by general agreement with derivative contracts (ISDA). This allows Castellum to offset positive and negative market values in the event of default.
|
|
Dec 31, 2019 |
|
Dec 31, 2018 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Asset |
|
Liability |
|
Net |
|
Asset |
|
Liability |
|
Net |
Interest rate derivatives |
|
26 |
|
–618 |
|
–592 |
|
0 |
|
–689 |
|
–689 |
Currency derivatives |
|
147 |
|
–270 |
|
–123 |
|
13 |
|
–40 |
|
–27 |
Gross value derivatives |
|
173 |
|
–888 |
|
–715 |
|
13 |
|
–729 |
|
–716 |
Netting |
|
–173 |
|
173 |
|
– |
|
–13 |
|
13 |
|
0 |
Net value derivatives |
|
0 |
|
–715 |
|
–715 |
|
0 |
|
–716 |
|
–716 |
Future cash flow
Future cash-flows attributable to interest rate derivatives consist of interest paid minus interest received as presented below. To calculate the variable part of the interest rate derivative, the STIBOR and CIBOR interest rates – as listed at year end – have been used throughout the full term of the derivative.
|
|
Future cash-flow of interest rate derivatives |
||||
---|---|---|---|---|---|---|
Year |
|
Interest to pay |
|
Interest to receive |
|
Net, MSEK |
2020 |
|
–378 |
|
219 |
|
–159 |
2021 |
|
–362 |
|
208 |
|
–154 |
2022 |
|
–363 |
|
204 |
|
–159 |
2023 |
|
–344 |
|
187 |
|
–157 |
2024 |
|
–227 |
|
93 |
|
–134 |
2025+ |
|
–217 |
|
87 |
|
–130 |
Total |
|
–1,891 |
|
998 |
|
893 |
Sensitivity analysis
The table below shows the interest rate derivative portfolio’s nominal net amount and market value and the market value of the portfolio with a +/- 1 percentage-point change in the interest rate. Based on the date of termination, interest rate derivatives that include an option have been reported in the same time segment as prior to the assumed change in interest rate.
End date |
|
Amount, |
|
Acquisition cost, |
|
Market value, |
|
Average interest rate |
|
Market value, interest rate +1 pp |
|
Market value, interest rate –1 pp |
---|---|---|---|---|---|---|---|---|---|---|---|---|
2020 |
|
3,522 |
|
– |
|
–5 |
|
0.7% |
|
0 |
|
–12 |
2021 |
|
1,350 |
|
– |
|
10 |
|
–0.2% |
|
33 |
|
–12 |
2022 |
|
1,600 |
|
– |
|
14 |
|
0.0% |
|
53 |
|
–25 |
2023 |
|
1,166 |
|
– |
|
23 |
|
0.2% |
|
13 |
|
34 |
2024 |
|
900 |
|
– |
|
–1 |
|
0.3% |
|
34 |
|
–40 |
2025+ |
|
8,188 |
|
– |
|
–676 |
|
0.0% |
|
–201 |
|
–1,192 |
Total |
|
16,726 |
|
– |
|
–634 |
|
0.2% |
|
–68 |
|
–1,247 |
Currency derivatives with a market value of MSEK 81 (32) are not included in the table above, since a change in the market interest rate has an insignificant effect on the market value.