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20. Derivatives and hedge accounting continued Policies
Vector initially recognises derivatives at fair value on the date the derivative contract is entered into, and subsequently they are re–measured to their fair value at each balance date. All derivatives are classif ied as level 2 on the fair value hierarchy explained in note 18. Vector designates certain derivatives as either: — Fair value hedges (of the fair value of recognised assets or liabilities or f irm commitments); or — Cash flow hedges (of highly probable forecast transactions). At inception each transaction is documented, detailing: — The economic relationship and the hedge ratio between hedging instruments and hedged items; — The risk management objectives and strategy for undertaking the hedge transaction; and — The assessment (initially and on an ongoing basis) of whether the derivatives that are used in the hedging transaction are highly effective in offsetting changes in fair values or cash flows of hedged items. The underlying risk of the derivative contracts is identical to the hedged risk component (i.e. the interest rate risk and the foreign exchange risk) therefore the group has established a one–to–one hedge ratio. Effectiveness is assessed by comparing the changes of the hedged items and hedging instruments. Hedge accounting is discontinued when the hedge instrument expires or is sold, terminated, exercised, or no longer qualif ies for hedge accounting. Vector has entered into cross currency interest rate swaps (the hedging instruments) to hedge the interest rate risk and foreign currency risk (the hedged risk) arising in relation to its USD senior notes (the hedged items). These transactions have been designated into fair value hedges. The following are recognised in prof it or loss: — The change in fair value of the hedging instruments; and — The change in fair value of the underlying hedged items attributable to the hedged risk. Once hedging is discontinued, the fair value adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised through prof it or loss from that date through to maturity of the hedged item. Vector has entered into interest rate swaps and cross currency interest rate swaps (the hedging instruments) to hedge the variability in cash flows arising from interest rate and foreign currency exchange rate movements in relation to its NZD floating rate notes and USD senior notes. The effective portion of changes in the fair value of the hedging instruments are recognised in other comprehensive income. The following are recognised in prof it or loss: — any gain or loss relating to the ineffective portion of the hedging instrument; and — fair value changes in the hedging instrument previously accumulated in other comprehensive income, in the periods when the hedged item is recognised in prof it or loss. Once hedging is discontinued, any cumulative gain or loss previously recognised in other comprehensive income is recognised in prof it or loss either: — at the same time as the forecast transaction; or — immediately if the transaction is no longer expected to occur. All derivatives are measured at fair value. A change in the market data used to determine fair value will have an impact on Vector’s f inancial statements. The graphs on the previous page show the sensitivity of the f inancial statements to a range of possible changes in market data at balance date.
Fair value hedges
Cash flow hedges
Market rate sensitivity
Notes to the Financial Statements
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