Page 153 - EXIM-Bank_Annual-Report-2023

Management Discussion and Analysis Ensuring Sustainability Commitment to Lead Upholding Accountability Financial Statements 151

Notes to the fiNaNcial statemeNts

11. DErIvATIvE FINANCIAL INSTruMENTS (cont’d)
At their inception, derivatives often involve only mutual exchange of promises with little or no transfer of consideration.
However, these instruments frequently involve a high degree of leverage and are very volatile. A relatively small movement
in the value of the asset, rate or index underlying a derivative contract may have a significant impact on the profit or loss of
the Group and the Bank.

Over-the-counter derivative may expose the Group and the Bank to the risks associated with absence of an exchange market
on which to close out an open position.
Swaps

Swaps are contractual agreements between two parties to exchange streams of payments overtime based on specified
notional amounts, in relation to movements in a specified underlying index such an interest/profit rate, foreign currency rate
or equity index.
Interest/profit rate swaps relate to contracts taken out by the Group and the Bank with other financial institution in which the
Group and the Bank either receive or pay a floating rate of interest/profit, respectively, in return for paying or receiving a fixed
rate of interest/profit. The payment flows are usually netted against each other with the difference being paid by one party
to the other.
In a cross currency interest/profit rate swap, the Group and the Bank swap their fixed coupon interest rate into a floating rate
coupon in different currencies.
Forwards

The Group and the Bank enter into Forward Exchange Contract to sell or buy a specific amount of currency at a specified
exchange rate for settlement in the future. The contract is entered for the Group’s and the Bank’s own requirement or on
behalf of customer based on approved foreign exchange line.

Fair values
Disclosure concerning the fair value of derivatives are provided in Note 43.

Fair value hedge
The financial instruments hedged for interest/profit rate risk and foreign currency risk consist of the Medium Term Notes
(“MTN”) and Multi-currency Sukuk Programme (“Sukuk”) issued by the Bank and the Group respectively.