25.2. Hedge accounting

The Group has entered into numerous derivative transactions to hedge exposure to currency risk, interest rate risk and OPL S.A. share price risk. The derivatives used by the Group include: cross currency interest rate swaps, cross currency swaps, interest rate swaps, currency options, currency forwards, non-deliverable forwards and stock options.

Certain derivative instruments are classified as cash flow hedges and the Group applies hedge accounting principles as stated in IFRS 9 (see Note 33.17). The cash flow hedges are used to hedge the variability of future cash flows that is attributable to a particular risk and could affect the consolidated income statement. The terms of the hedging instruments match the terms of the hedged items. The Group has established hedge ratios at the level of 1:1 as the underlying risks of the hedging instruments are identical to the hedged risks. Hedge effectiveness is determined at the inception of the hedge relationship and through periodic prospective effectiveness assessment to ensure that an economic relationship exists between the hedged item and the hedging instrument.

Derivatives are used for hedging activities and it is the Group’s policy that derivative financial instruments are not used for trading (speculative) purposes. However, certain derivatives held by the Group are not designated as hedging instruments as set out in IFRS 9 and hedge accounting principles are not applied to those instruments. The Group considers those derivatives as economic hedges because they, in substance, protect the Group against currency risk, interest rate risk and OPL S.A. share price risk.

Detailed information on derivative financial instruments, including hedging relationship, that are used by the Group is presented in Note 23.