Notes

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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:

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, 2021

 

Dec. 31, 2020

 

 

 

 

 

 

 

 

 

 

 

Notional amount of hedging instruments within hedge accounting

 

 

 

 

 

 

 

 

 

 

Hedging interest rate risk

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

9,413

 

38,214

 

6,971

 

54,598

 

47,7101

Hedging currency risk

 

 

 

 

 

 

 

 

 

 

Currency forwards/Cross-currency swaps

 

 

 

 

 

 

 

 

 

 

Currency forwards/Cross-currency swaps in CNY

 

9,337

 

4,594

 

123

 

14,054

 

6,268

Currency forwards/Cross-currency swaps in GBP

 

12,776

 

15,163

 

 

27,939

 

17,182

Currency forwards/Cross-currency swaps in USD

 

9,895

 

17,175

 

3,147

 

30,218

 

32,316

Currency forwards/Cross-currency swaps in other currencies

 

20,048

 

20,900

 

55

 

41,003

 

35,529

Currency options

 

 

 

 

 

 

 

 

 

 

Currency options in USD

 

3,701

 

3,825

 

 

7,527

 

8,749

Currency options in CNY

 

6,122

 

4,174

 

 

10,296

 

3,986

Currency options in other currencies

 

2,212

 

3,817

 

 

6,029

 

6,287

Combined interest rate and currency risk hedging

 

 

 

 

 

 

 

 

 

 

Cross-currency interest rate swaps

 

628

 

661

 

 

1,289

 

1,655

 

 

 

 

 

 

 

 

 

 

 

Notional amount of other derivatives

 

 

 

 

 

 

 

 

 

 

Hedging Interest rate risk

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

25,689

 

45,653

 

20,892

 

92,233

 

88,6001

Hedging Currency risk

 

 

 

 

 

 

 

 

 

 

Currency forwards/Cross-currency swaps

 

 

 

 

 

 

 

 

 

 

Currency forwards/Cross-currency swaps in USD

 

6,154

 

4,916

 

390

 

11,461

 

11,722

Currency forwards/Cross-currency swaps in other currencies

 

13,123

 

1,468

 

0

 

14,591

 

14,977

Currency options

 

 

 

 

 

 

 

 

 

 

Currency options in USD

 

532

 

636

 

 

1,168

 

82

Currency options in other currencies

 

3

 

 

 

3

 

41

Combined interest rate and currency risk hedging

 

 

 

 

 

 

 

 

 

 

Cross-currency interest rate swaps

 

4,450

 

9,111

 

3,363

 

16,925

 

14,501

Hedging Commodity price risk

 

 

 

 

 

 

 

 

 

 

Forward commodity contracts (aluminum)

 

934

 

1,535

 

 

2,470

 

3,099

Forward commodity contracts (copper)

 

300

 

370

 

 

670

 

938

Forward commodity contracts (nickel)

 

457

 

2,146

 

390

 

2,992

 

2,326

Forward commodity contracts (other)

 

110

 

8

 

 

117

 

143

1

Prior-year figures adjusted.

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:

in %

 

EUR

 

AUD

 

CAD

 

CHF

 

CNY

 

CZK

 

GBP

 

JPY

 

SEK

 

USD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate for six months

 

–0.5757

 

0.1232

 

0.6290

 

–0.7100

 

2.4828

 

3.7865

 

0.4944

 

–0.0375

 

–0.0219

 

0.1940

Interest rate for one year

 

–0.5103

 

0.3845

 

1.0454

 

–0.6700

 

2.4930

 

3.9020

 

0.7582

 

–0.0375

 

0.0455

 

0.3900

Interest rate for five years

 

0.0160

 

1.6550

 

1.8370

 

–0.2255

 

3.0600

 

3.8450

 

1.0514

 

–0.0125

 

0.7100

 

1.1150

Interest rate for ten years

 

0.3030

 

1.9800

 

1.9870

 

0.0955

 

4.0700

 

3.2550

 

0.9541

 

0.0775

 

0.9680

 

1.3100