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 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 replacement measures required have already been initiated for the interest rate benchmarks specified. By adapting systems and processes, these measures will 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 €18,436 million (previous year: €25,466 million) in total. In the fiscal year, €13,876 million of this total was attributable to the USD LIBOR (previous year: €12,617 million), and €4,560 million to the CAD CDOR (previous year: €3,620 million). Compared with the previous year, we believe that the notional amounts of GBP LIBOR (previous year: €9,147 million) and JPY LIBOR (previous year: €82 million) hedging instruments are no longer exposed to any uncertainty from the IBOR reform. The JPY LIBOR hedging instruments have expired or have been switched to TONAR. For hedges in existence as of the reporting date, the GBP LIBOR was replaced by the SONIA interest rate benchmark in fiscal year 2021, and new transactions were entered into on the basis of SONIA. For GBP LIBOR-based derivatives maturing in the first quarter of 2022 that have no date for adjusting the interest rate after the reporting date, there was no need to change the interest rate benchmark.

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:

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 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 €16.8 billion (previous year: €10.4 billion), and the notional volume with a remaining maturity of more than one year amounted to €1.8 billion (previous year: €0.2 billion).

Also in connection with fund investments, the Group held credit default swaps with a notional amount of €21.4 billion (previous year: €36.6 billion).

Existing cash flow hedges in the notional amount of €0.6 billion (previous year: €2.1 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 0.62% 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 1.20; EUR/GBP at 0.88; EUR/CNY at 7.83.

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: