Note 20 Derivatives

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,
MSEK

 

Acquisition cost,
MSEK

 

Market value,
MSEK

 

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.