38.2 Cash flow hedge

As at 31 December 2021, the Group had the following hedging contracts that were subject to hedge accounting principles. The items below were recognised as a component of equity: 

Futures contracts for the purchase of aluminium in PLN ‘000 (after translation)

The Group hedges itself against commodity risk using futures contracts, with the prices of aluminium at the London Metal Exchange [LME] as the underlying asset. These futures contracts are standardised and provide for 25 tons of aluminium, whereas they are settled on the third Wednesday of each month.

Hedge accounting: 

The risk at the Group results from the purchase of raw materials and products based on primary aluminium, the price of which depends on the quoting on the LME. In order to limit the risk, in 2021 and 2020 hedge fully related to the risk of changes in raw materials prices was applied.   

Managing the risk of aluminium prices fluctuations refers to the area of raw materials purchases and products sales. 

In order to hedge the aluminium prices, the Group companies enter into futures purchase contracts denominated in USD or EUR, at the amounts equivalent to the product orders received.  

The principles of hedging the risk of prices are adjusted to the specifics of the respective operating segments. 

Grupa Kęty S.A. (EPS) enters into futures purchase contracts denominated in EUR, at the amounts equivalent to the orders received, with the maximum limit of unhedged commercial transactions specified as 1,000 tons of aluminium and the maximum limit of transactions hedging non-confirmed orders of 1,000 tons, whereas it is the total value for the risk of price changes at the exchange.  

The hedge level of Aluprof S.A. (ASS) results from the average monthly demand for the raw materials, calculated on the basis of the procurement plan, adjusted for the expected changes in the level of sales.

The effectiveness of the concluded transactions is measured by the comparison of the potential change in the value of the future liabilities on account of aluminium purchases at variable prices and the potential change in the value of hedging transactions. Owing to the fact that the settlement base is the same in both cases, the effectiveness ex ante is 100%. 

Currency:

In the reporting periods, in order to hedge the currency risk, the Group used only forward contracts for the purchase/sale of currencies.   

As the Group currency position for EUR was usually long (which means the dominance of revenue denominated in this currency over expenses), whereas for USD it was short (which means the dominance of expenses denominated in this currency over revenue), the hedging transactions were aimed at the purchase of USD for PLN. The risk of a long position in EUR is compensated with natural hedging, e.g. purchase of aluminium for EUR (instead of USD), EUR sale forward transactions, and partial financing of operations in EUR.  

The amounts and settlement dates for the transactions are not standardised and they are subject to individual agreements with a bank. However, the Group adopted a principle that the currency transactions aimed at hedging cash flows in a given month are concluded with the date of delivery on the last working day of a given month and closed (through the conclusion of opposite transactions) in a given month or realised through a delivery.   

Hedge accounting:

The currency risk at the Group originates from the purchase of raw materials and sales of products in foreign currencies, as well as in relation to the purchase of property, plant and equipment in foreign currencies.  

The principles of currency risk hedging are adjusted to the specifics of the companies. 

In 2021, Grupa Kęty S.A. (EPS) entered into hedging transactions with regard to the sale of EUR for PLN, which was aimed at limiting the exchange risk originating from the sales denominated in EUR. 

The FPS companies enter into transactions hedging the FX risk related to the sales in GPB. Aluprof hedges its FX risk designating the net position as a difference between the revenue and expenditure in the respective currency. The company applies hedging instruments when the level of the monthly FX position of a given currency, with the stable +/- trend in the last 6 months, exceeds GBP 500,000, or USD 2,000,000, or EUR 1,500,000.  

Effectiveness of hedging transactions: 

As regards transactions hedging the volatility of USD/PLN, GBP/PLN, EUR/PLN exchange rates, the transaction effectiveness is the ratio of the amount of cash flows resulting from commercial transactions, adjusted for changes related to their current value as a result of the hedged risk, to the cash flows resulting from the realisation of the hedging transaction, adjusted for the changes related to their current value as a result of the hedged risk. 

The main factor of non-effective hedge are the differences in the actual payment dates in the hedged (commercial) transactions and the dates of the hedging transactions, concluded on a standard basis on the last business day of a month.   

The table below presents a statement of transactions concluded by the Group. 

(Sale) of EUR for PLN 

(Sale) of USD for PLN

(Sale) of GBP for PLN