Introduction policy. If you own a home


are financial contracts that derive its value from an underlying
asset. It’s an agreement between the buyer and the seller to purchase the asset
at a specific price on a specific date. The four basic types of derivatives
are forward Contracts, future contracts option contracts and swap.

The seller contract does not have to own the underlying
asset. He can accomplish the contract by giving the buyer enough money to buy
the asset at the prevailing price. He can also give the buyer another
derivative contract that offsets the value of the first. This makes
derivatives easier to trade than the asset.




Hedging is an investment that protects your assets from risk.
Hedging is to minimize or offset the chance that your assets will lose
value. It limits your loss. Hedging is an investment to reduce the risk of
adverse price movements in an asset. The hedge is to take an offsetting
position in a relating security, like future contracts.




Hedging is like taking out an insurance policy. If you
own a home in a flood-prone area, you will want to protect that asset from the
risk of flooding – to hedge it, in other words – by taking out
flood insurance. There is a risk-reward tradeoff inherent in
hedging; while it reduces potential risk, it also chips away at potential gains.
Put simply, hedging is not free. In the case of the flood insurance policy, the
monthly payments add up, and if the flood never comes, the policyholder
receives no payout. Still, most people would choose to take that predictable,
circumscribed loss rather than suddenly lose the roof over their head.

A perfect hedge is one that eliminates all risk
in a position or portfolio. In other words, the hedge is 100% inversely
connected to the vulnerable asset. This is more an ideal than a reality on
the ground and even the hypothetical perfect hedge is not without cost. Basis
risk refers to risk that the asset and a hedge won’t move in opposite
directions as expected; “basis” refers to the discrepancy.


Hedging Through Derivatives


Derivatives are securities that change in terms of one or
more underlying assets; they include swaps, options, futures and forward
contracts. The underlying assets can be bonds, stocks, commodities, currencies,
indices or interest rates. Derivatives can be effective hedges against their
underlying assets, since the relationship between the two clearly defined.

The efficiency of a derivative hedge expressed in terms
of delta, sometimes called the “hedge ratio.” Delta is the amount the
price of a derivative moves per one dollar movement in the price of the
underlying asset.

Call Option


A call option is an agreement that gives an investor the
right, but does not give the obligation, to buy a bond, stock, commodity or
other instrument at a specified price within a specific time period. It may help
you to remember that a call option gives you the right to call in, or buy, an
asset. You profit on a call when the underlying asset increases in


How Options Work


An options contract gives the holder the right
to buy one hundred shares of the underlying security at a specific
price, known as the strike price, up until a specified date, known as
the expiration date. For example, a single call option contract may give a
holder the right to buy one hundred shares of Apple stock at a price of one
hundred dollars until Dec. 31, 2017. As the value of Apple stock goes up, the
price of the options contract goes up, and vice versa. Options contract holders
can hold the contract until the expiration date, at which point they can take
delivery of the one hundred shares of stock or sell the options contract at any
point before the expiration date at the market price of the contract at the




A speculator is a person who trades, commodities,
bonds, equities or currencies with a higher average risk in return for a higher-average
profit potential. Speculators take large risks, especially with respect to
anticipating future price movements, in the hope of making quick, large gains.

are typically sophisticated risk-taking investors with expertise in the markets
in which they are trading; they usually use highly leveraged investments, such
as futures and options.

These investors are called speculators due to their
tendency to attempt to predict price changes in more volatile sections of the
markets, believing, or speculating, that a high profit will occur even if
market indicators may suggest otherwise. Normally, speculators operate in a
shorter period than a traditional investor.


Principles behind Speculation


Speculative activities carry high amount of risk, because
various market indicators do not support the likelihood of asset appreciation.
Speculators are also more likely to purchase futures or options over
traditional stocks.


The Group
Financial Department take all the decisions except those decisions for risk
hedging policy. The Group limits the usage of derivatives to sole the purpose
of hedging clearly to identify the exposure. The Financial Risks Committee is
responsible for identifying, defining and approving financial risk management
policies, assessing risks, and approving and monitoring hedges. In monthly
basis it meets and comprises representatives from the Group Financial
Department and the Corporate Financing Department.


Derivative financial instruments


To manage
financial exposures derivative financial instruments are used. Derivatives are
first recognized at fair value on the date a derivative contract is entered
into and are subsequently stately at their fair value.


The Fair value
is based on the market value for listed instruments or on mathematical models,
such as option pricing models and discounted cash flow calculations for
unlisted instruments. Those models take into consideration the market data.


Currency transaction risk


The Corporate Financing Department monitor foreign
currency transaction risk. All of the group companies calculate its accounting
foreign exchange exposure in relation to its functional currency and hedges it
systematically. A number of temporary exemptions can be granted by the Group
Financial Department when it is not possible to hedge a currency or when it has
justified under exceptional market conditions.


The same type and equivalent maturities of the foreign
currency payables and receivables netted off and only the net exposure hedged.
The financial holding company or a bank can carry it out. It in turn assesses
its own resulting exposure and hedges it with its banking partners. The forward
currency contracts are the fundamental hedging instruments. The structural portion
of the exposure is hedged with long term instruments (six years maturity
maximum) and the operating part is hedged with short term instruments
(generally maturity is shorter than or equal to three months). Hedging and
currency risk monitoring is based on Group internal levels and steps. The
transactional currency risk alert system implemented throughout the Group under
the responsibility of the Corporate Department. These exposures tracked on a
monthly basis on a detailed management report.




Transactional Currency Risk


This table set
forth the Group transactional foreign currency accounting exposures (when a
monetary asset or liability is denominated in a currency other than the
functional currency), before and after hedging:



At December 31, 2016, a subsidiary had net exposure in
EUR for one hundred seven  million euro,
due to the change of its functional currency as of January 1, 2017. This
exposure being hedged from the beginning of January 2017.

At December 31, 2015, another subsidiary had net exposure
in USD for fifty three million euro and in EUR for sixty six million euro, due
to the change of its functional currency as of January 1, 2016. This exposure
had been hedged from the beginning of January 2016.


A negative aggregate impact can come from unfavorable change
in each of the foreign currencies mentioned in the table above against the
functional currencies of the companies which have the currency transaction
exposure, after hedging, of less than one million euro (2015: one million euro)
in the consolidated income statement for every cent change. A symmetrical
impact can come from favorable change. It relatively has low sensitivity to the
transaction currency risk this is due to the objective described in paragraph
above “Currency risk”. Because of the low volume of cash flow hedge
derivatives, the equity sensitivity to currency risk is not significant.



Derivative contractual amounts


This Group concluded long-term currency derivative
contracts with maturities between one and six years for a total amount of nine
hundred fifty eight million euro (2015: one thousand two hundred eighteen
million euro). The nominal amounts by major currencies bought against the euro
are denominated in USD for one hundred fourty seven million euro (2015: two
hundred twenty one million euro), in BRL for one hundred fourty five million
euro (2015: two hundred six million euro), in CNH and CNY for  three hundred sixty-five million euro (2015: three
hundred ninety four million euro) and in THB for two hundred twenty million
euro (2015: two hundred twenty million euro). The maturity of the other
currency derivative contracts does not generally exceed one year. Those amounts
of the currency derivatives are given by currency below:




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