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132 EXIM BANK MALAYSIA
Annual Report 2020

NOTES TO THE FINANCIAL STATEMENTS

9. 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 over-time 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 42.
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.