23. Derivatives

As at 31 December 2020 and 2019, the Group’s derivatives portfolio constituted financial instruments for which there was no active market (over-the-counter derivatives), mainly interest rate swaps, currency swaps, non-deliverable forwards and stock options. To price these instruments the Group applies standard valuation techniques. The fair value of swap/forward transaction represents discounted future cash flows, where the applicable market interest rate curves constitute the base for calculation of discounting factors and amounts in foreign currencies are converted into PLN at the National Bank of Poland period-end average exchange rate. The fair value of stock options is calculated on the basis of Black-Scholes model. Valuation of derivatives is also adjusted by counterparty (credit valuation adjustment – “CVA”) or own (debit valuation adjustment – “DVA”) credit risk. CVA and DVA estimates were not material compared to the total fair value of the related derivatives.

The derivative financial instruments used by the Group are presented below:

The Group’s maximum exposure to credit risk is represented by the carrying amounts of derivatives. The Group enters into derivatives contracts with Orange S.A. and leading financial institutions. Limits are applied to monitor the level of exposure to credit risk on the counterparties. Limits are based on each institution’s rating. In case the counterparty’s financial soundness is deteriorating, the Group applies the appropriate measures mitigating the default risk.

The change in cash flow hedge reserve is presented below:

Gains/losses on cash flow hedges cumulated in cash flow hedge reserve as at 31 December 2020 are expected to mature and affect the consolidated income statement in years 2021-2024.