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Financial and capital risk management | 12 Months Ended
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Dec. 31, 2020
Financial and capital risk management |
Financial and capital risk management | 19. Financial and capital risk management The Company is exposed to several financial and capital risk factors that may impact the its performance and equity position. The evaluation of the exposure to financial and capital risks is performed periodically to support the decision making process regarding the risk management strategy. The Company's policy aims at establishing a capital structure that will ensure the continuity of our business in the long term. Within this perspective, the Company has been able to deliver value to stockholders through dividend payments and capital gain, and at the same time maintain a debt profile suitable for its activities, with an amortization well distributed over the years, thus avoiding a concentration in one specific period. The Board of Directors establishes and supervises the management of financial risks with the support of a Financial Committee. The Financial Committee ensures that Company's financial activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with the Company's policies and objectives. The Company has developed its strategy through an integrated view of the risks to which it is exposed, considering not only the risk generated by the variables traded in the financial market (market risk) and the liquidity risk, but also the risk arising from obligations assumed by third parties to the Company (credit risk), among others. The Company uses derivative financial instruments to protect its exposure to these market risks arising from operating, financing and investment activities. The portfolios composed of these financial instruments are monitored on a monthly basis, allowing the monitoring of financial results and their impact on cash flow. Currently, the Company applies hedge accounting to its net investment in foreign operation and nickel and palladium revenue programs. The Company does not have any derivatives increasing financial leverage beyond the nominal amount of its contracts. The Company contracts derivatives solely to mitigate market risks.
Risks |  | Origin of the exhibition |  | Management |
Market Risk-Exchange Rate |  | Contracts for the sale of ore and financial instruments that are not denominated in US$ |  | Swap and forward operations |
Market risk-Interest rate |  | Loans and financing indexed to LIBOR |  | Swap operations |
Market risk-Product and input prices |  | Volatility of commodity and input prices |  | Option contracts |
Credit Risk |  | Receivables, derivative transactions, guarantees, advances to suppliers and financial investments |  | Portfolio diversification and policies for monitoring counterparty solvency and liquidity indicators |
Liquidity risk |  | Contractual or assumed obligations |  | Availability of revolving credit lines |
| a) |  | Method and techniques of valuation of derivatives
The risk of the derivatives portfolio is measured using the delta-Normal parametric approach and considers that the future distribution of the risk factors and its correlations tends to present the same statistic properties verified in the historical data. The value at risk estimate considers a 95% confidence level for a one-business daytime horizon. The derivative financial instruments were evaluated using the curves and market prices that impact each instrument on the calculation dates. For the pricing of options the Company generally uses the Black & Scholes model. In this model, the fair value of the derivative is obtained basically as a function of the volatility and price of the underlying asset, the exercise price of the option, the risk-free interest rate and the term to maturity of the option. In the case of options where the result is a function of the average price of the underlying asset in a certain period of the option's life, called Asian, the Company uses the Turnbull & Wakeman model. In this model, in addition to the factors that influence the option price in the Black & Scholes model, the average price formation period is considered. In the case of swaps, both the present value of the active and the passive tip are estimated by discounting their cash flows by the interest rates in the corresponding currencies. The fair value is obtained by the difference between the present value of the active tip and the passive tip of the swap in the reference currency. In the case of swaps linked to Brazilian long-term interest rate ("TJLP"), the fair value calculation considers the constant TJLP, i.e., projections of future cash flows in reais are made considering the last TJLP disclosed. Forward and future contracts are priced using the future curves of the respective underlying assets. These curves are usually obtained from the exchanges where these assets are traded, such as the London Metals Exchange ("LME"), the Commodities Exchange ("COMEX") or other market price providers. When there is no price for the desired maturity, the Company uses interpolations between the available maturities.
| a.i) |  | Libor discontinuation
In July 2017, the UK Financial Conduct Authority ("FCA"), which regulates the London Interbank Offered Rate ("LIBOR"), announced the effective discontinuation of that rate from the end of 2021, as banks will no longer be required to contribute rate quotations. The Company is currently evaluating the potential impact of the eventual replacement of the LIBOR interest rate.
| a.ii) |  | Effects of derivatives on the balance sheet
|  | Assets
|  | December 31, 2020 |  | December 31, 2019
|  | Current |  | Non-current |  | Current |  | Non-current
Foreign exchange and interest rate risk |  |  |  |  |  |  |  |
CDI & TJLP vs. US$ fixed and floating rate swap |  | — |  | — |  | 13 |  | —
IPCA swap |  | 7 |  | 38 |  | 82 |  | 117
Eurobonds swap |  | — |  | 3 |  | — |  | —
Pre-dollar swap |  | — |  | 9 |  | 21 |  | 8
Forward transactions |  | — |  | — |  | 1 |  | —
|  | 7 |  | 50 |  | 117 |  | 125
Commodities price risk |  |  |  |  |  |  |  |
Base metals products |  | 30 |  | — |  | 151 |  | 9
Gasoil, Brent and freight |  | 97 |  | — |  | 20 |  | —
|  | 127 |  | — |  | 171 |  | 9
Others |  | — |  | 16 |  | — |  | 50
|  | — |  | 16 |  | — |  | 50
Total |  | 134 |  | 66 |  | 288 |  | 184
|  | Liabilities
|  | December 31, 2020 |  | December 31, 2019
|  | Current |  | Non-current |  | Current |  | Non-current
Foreign exchange and interest rate risk |  |  |  |  |  |  |  |
CDI & TJLP vs. US$ fixed and floating rate swap |  | 111 |  | 525 |  | 48 |  | 80
IPCA swap |  | 72 |  | 100 |  | 13 |  | 37
Eurobonds swap |  | 4 |  | — |  | 6 |  | 29
Pre-dollar swap |  | 62 |  | 58 |  | 8 |  | 37
Libor swap |  | 1 |  | 6 |  | — |  | —
Forward transactions |  | 1 |  | — |  | — |  | —
|  | 251 |  | 689 |  | 75 |  | 183
Commodities price risk |  |  |  |  |  |  |  |
Base metals products |  | 46 |  | — |  | 4 |  | 4
Gasoil, Brent and freight |  | 13 |  | — |  | 8 |  | —
|  | 59 |  | — |  | 12 |  | 4
Others |  | 18 |  | — |  | 7 |  | 120
|  | 18 |  | — |  | 7 |  | 120
Total |  | 328 |  | 689 |  | 94 |  | 307
| a.iii) |  | Net exposure
|  | December 31, 2020 |  | December 31, 2019
Foreign exchange and interest rate risk |  |  |  |
CDI & TJLP vs. US$ fixed and floating rate swap |  | (636) |  | (115)
IPCA swap |  | (127) |  | 149
Eurobonds swap |  | (1) |  | (35)
Pre-dollar swap |  | (111) |  | (16)
Libor swap |  | (7) |  | —
Forward transactions |  | (1) |  | 1
|  | (883) |  | (16)
Commodities price risk |  |  |  |
Base metals products |  | (16) |  | 152
Gasoil, Brent and freight |  | 84 |  | 12
|  | 68 |  | 164
Others |  | (2) |  | (77)
|  | (2) |  | (77)
Total |  | (817) |  | 71
| a.iv) |  | Effects of derivatives on the income statement
|  | Gain (loss) recognized in the income statement
|  | Year ended December 31,
|  | 2020 |  | 2019 |  | 2018
Foreign exchange and interest rate risk |  |  |  |  |  |
CDI & TJLP vs. US$ fixed and floating rate swap |  | (746) |  | (39) |  | (206)
IPCA swap |  | (262) |  | 118 |  | (23)
Eurobonds swap |  | 28 |  | (39) |  | (27)
Pre-dollar swap |  | (160) |  | 2 |  | (23)
Libor swap |  | (7) |  | — |  | —
|  | (1,147) |  | 42 |  | (279)
Commodities price risk |  |  |  |  |  |
Base metals products |  | 10 |  | 58 |  | (25)
Gasoil, Brent and freight |  | (134) |  | 42 |  | 6
|  | (124) |  | 100 |  | (19)
Others |  | 61 |  | 102 |  | 32
|  | 61 |  | 102 |  | 32
Total |  | (1,210) |  | 244 |  | (266)
| a.v) |  | Effects of derivatives on the cash flows
|  | Financial settlement inflows (outflows)
|  | Year ended December 31,
|  | 2020 |  | 2019 |  | 2018
Foreign exchange and interest rate risk |  |  |  |  |  |
CDI & TJLP vs. US$ fixed and floating rate swap |  | (141) |  | (381) |  | (135)
IPCA swap |  | — |  | (28) |  | 7
Eurobonds swap |  | (6) |  | (5) |  | (3)
Pre-dollar swap |  | (49) |  | 8 |  | 10
|  | (196) |  | (406) |  | (121)
Commodities price risk |  |  |  |  |  |
Base metals products |  | 8 |  | 48 |  | 8
Gasoil, Brent and freight |  | (206) |  | 2 |  | 49
|  | (198) |  | 50 |  | 57
|  | 68 |  | 21 |  | (3)
Others |  |  |  |  |  |
Derivatives designated as cash flow hedge accounting |  |  |  |  |  |
Nickel |  | 292 |  | 11 |  | —
|  | 292 |  | 11 |  | —
Total |  | (34) |  | (324) |  | (67)
| a.vi) |  | Hedge accounting
|  | Gain(loss) recognized in the other comprehensive income
|  | Year ended December 31,
|  | 2020 |  | 2019 |  | 2018
Net investments hedge |  | (2,786) |  | (392) |  | (543)
Cash flow hedge (Nickel and Palladium) |  | (104) |  | 150 |  | —
Net investment hedge-The Company uses hedge accounting for the foreign exchange risk arising from Vale S.A.'s net investments in Vale International S.A. and Vale Holding BV. With the hedge program, the Company's debt with third parties denominated in dollars and euros serves as a hedge instrument for investments in these subsidiaries. As of December 31, 2020, the amount of debt designated as a hedge instrument for these investments is US$2,168 and EUR750 million. As a result of the hedge program, the impact of the exchange rate variation on the debt denominated in dollars and euros is now partially recorded in other comprehensive results, under "accumulated translation adjustments". Cash Flow Hedge (Nickel)-In order to reduce the cash flow volatility due to nickel price fluctuations, the Company implemented the Nickel Revenue Hedge Program in 2019. In this program, hedging operations were executed, through option contracts, to protect a portion of the projected volume of sales at floating, highly probable realization prices, guaranteeing prices above the average unit cost of nickel production for the protected volumes. In April 2020, the option contracts were liquidated in order to increase the Company's cash position as a result of COVID-19 in order to increase the Company's liquidity, temporarily discontinuing the Nickel Revenue Hedge program. The amount that was accumulated in the cash flow hedge reserve up to the settlement date of these option contracts is being recycled to income as the sale of nickel is recognized in the income statement. In October 2020, the Company executed new hedge operations, continuing the Nickel Revenue Hedge program. The contracts are traded on the London Metal Exchange or over-the-counter market and the hedged item's P&L is offset by the hedged item's P&L due to Nickel price variation.
|  |  |  |  |  |  |  |  |  |  |  |  |  | Financial |  |  |  |
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|  |  |  |  |  |  |  |  |  |  |  |  |  | Inflows |  |  |  | Fair value
|  | Notional (ton) |  |  |  | Average |  | Fair value |  | (Outflows) |  | Value at Risk |  | by year
|  | December 31, |  | December 31, |  | Bought/ |  | strike |  | December 31, |  | December 31, |  | December 31, |  | December 31, |  |
Flow |  | 2020 |  | 2019 |  | Sold |  | (US$/ton) |  | 2020 |  | 2019 |  | 2020 |  | 2020 |  | 2021
Nickel Revenue Hedging Program (i) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Call options |  | 58,620 |  | 75,984 |  | S |  | 17,664 |  | (46) |  | (12) |  | — |  | 10 |  | (46)
Put options |  | 58,620 |  | 75,984 |  | B |  | 15,000 |  | 28 |  | 162 |  | 292 |  | 6 |  | 28
Total |  |  |  |  |  |  |  |  |  | (18) |  | 150 |  | 292 |  | 16 |  | (18)
| (i) |  | With the hedge structure, the company ensures prices between US$15,000/t and US$17,664/t for the program's sales volume.
Cash flow hedge (Palladium)-To reduce the volatility of its future cash flows arising from changes in palladium prices, the Company implemented a Palladium Revenue Hedging Program. Under this program, hedge operations were executed using forwards and option contracts to protect a portion of the highly probable forecast sales at floating prices. A hedge accounting treatment is given to this program. The derivative transactions under the program are negotiated over-the-counter and the financial settlement inflows/outflows are offset by the protected items' losses/gains due to palladium price changes.
|  |  |  |  |  |  |  |  |  |  |  |  |  | Financial |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  | settlement |  |  |  | Fair
|  |  |  |  |  |  |  |  |  |  |  |  |  | Inflows |  | Value at |  | value
|  | Notional (t oz) |  |  |  |  |  | Fair value |  | (Outflows) |  | Risk |  | by year
|  | December 31, |  | December 31, |  | Bought / |  | Average strike |  | December 31, |  | December 31, |  | December 31, |  | December 31, |  |
Flow |  | 2020 |  | 2019 |  | Sold |  | (US$/t oz) |  | 2020 |  | 2019 |  | 2020 |  | 2020 |  | 2021
Palladium Revenue Hedging Program |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Palladium Forwards |  | — |  | — |  | S |  | — |  | — |  | — |  | 3 |  | — |  | —
Call Options |  | 7,200 |  | — |  | S |  | 2,347 |  | (1) |  | — |  | — |  | — |  | (1)
Put Options |  | 7,200 |  | — |  | B |  | 2,050 |  | — |  | — |  | — |  | — |  | —
Total |  |  |  |  |  |  |  |  |  | (1) |  | — |  | — |  | — |  | (1)
| b) |  | Market risk - Foreign exchange and interest rates
The Company's cash flow is exposed to the volatility of several currencies against the U.S. dollar. While most of our product prices are indexed to U.S. dollars, most of our costs, disbursements and investments are indexed to currencies other than the U.S. dollar, principally the Brazilian real and the Canadian dollar. The Company implements hedge transactions to protect its cash flow against the market risks that arises from its debt obligations–mainly currency volatility. The hedges cover most of the debt denominated in Brazilian real and euros. The Company uses swap and forward transactions to convert debt linked to Brazilian real and Euros into U.S. dollar, with volumes, flows and settlement dates similar to those of the debt instruments-or sometimes lower, subject to market liquidity conditions. Hedging instruments with shorter settlement dates are renegotiated through time so that their final maturity matches-or becomes closer-to the debts` final maturity. At each settlement date, the results of the swap and forward transactions partially offset the impact of the foreign exchange rate in the Company's obligations, contributing to stabilize the cash disbursements in U.S. dollar.
| (b.i) |  | Protection programs for the R$ and EUR denominated debt instruments and other liabilities
To reduce cash flow volatility, swap and forward transactions were implemented to convert into US$ the cash flows from certain liabilities denominated in R$ with interest rates linked mainly to Brazilian Interbank Interest rate ("CDI"), TJLP and consumer price index ("IPCA"). In those swaps, the Company pays fixed or floating rates in US$ and receives payments in R$ linked to the interest rates of the protected liabilities. Swap transactions were implemented to convert into US$ the cash flows from certain debt instruments issued in Euros by the Company, where receives fixed rates in EUR and pays fixed rates in US$. The swap and forward transactions were negotiated over-the-counter and the protected items are the cash flows from debt instruments and other liabilities linked to R$ and EUR.
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Financial |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Settlement |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Inflows |  |  |  |  |  |  |  |
|  | Notional |  |  |  |  |  | Fair value |  | (Outflows) |  | Value at Risk |  | Fair value by year
|  | December 31, |  | December 31, |  |  |  | Average |  | December 31, |  | December 31, |  | December 31, |  | December 31, |  |  |  |  |  |
Flow |  | 2020 |  | 2019 |  | Index |  | rate |  | 2020 |  | 2019 |  | 2020 |  | 2020 |  | 2021 |  | 2022 |  | 2023+
CDI vs. US$ fixed rate swap |  |  |  |  |  |  |  |  |  |  |  | (473) |  | (38) |  | (129) |  | 42 |  | (60) |  | (96) |  | (317)
Receivable |  | R$ | 9,445 |  | R$ | 2,115 |  | CDI |  | 100.09 | % |  |  |  |  |  |  |  |  |  |  |  |  |
Payable |  | US$ | 2.213 |  | US$ | 558 |  | Fix |  | 2.09 | % |  |  |  |  |  |  |  |  |  |  |  |  |
TJLP vs. US$ fixed rate swap |  |  |  |  |  |  |  |  |  |  |  | (163) |  | (77) |  | (44) |  | 9 |  | (50) |  | (42) |  | (71)
Receivable |  | R$ | 1,651 |  | R$ | 2,111 |  | TJLP + |  | 1.14 | % |  |  |  |  |  |  |  |  |  |  |  |  |
Payable |  | US$ | 460 |  | US$ | 601 |  | Fix |  | 3.05 | % |  |  |  |  |  |  |  |  |  |  |  |  |
R$ fixed rate vs. US$ fixed rate swap |  |  |  |  |  |  |  |  |  |  |  | (111) |  | (18) |  | (48) |  | 11 |  | (63) |  | (51) |  | 3
Receivable |  | R$ | 2,512 |  | R$ | 2,173 |  | Fix |  | 5.43 | % |  |  |  |  |  |  |  |  |  |  |  |  |
Payable |  | US$ | 621 |  | US$ | 604 |  | Fix |  | 0.31 | % |  |  |  |  |  |  |  |  |  |  |  |  |
IPCA vs. US$ fixed rate swap |  |  |  |  |  |  |  |  |  |  |  | (173) |  | 46 |  | (12) |  | 13 |  | (73) |  | (8) |  | (92)
Receivable |  | R$ | 2,363 |  | R$ | 2,826 |  | IPCA + |  | 5.10 | % |  |  |  |  |  |  |  |  |  |  |  |  |
Payable |  | US$ | 622 |  | US$ | 759 |  | Fix |  | 4.02 | % |  |  |  |  |  |  |  |  |  |  |  |  |
IPCA vs. CDI swap |  |  |  |  |  |  |  |  |  |  |  | 45 |  | 104 |  | 44 |  | 1 |  | 7 |  | 38 |  | —
Receivable |  | R$ | 694 |  | R$ | 1,634 |  | IPCA + |  | 6.63 | % |  |  |  |  |  |  |  |  |  |  |  |  |
Payable |  | R$ | 550 |  | R$ | 1,350 |  | CDI |  | 98.76 | % |  |  |  |  |  |  |  |  |  |  |  |  |
EUR fixed rate vs. US$ fixed rate swap |  |  |  |  |  |  |  |  |  |  |  | (1) |  | (35) |  | (6) |  | 5 |  | (4) |  | (3) |  | 6
Receivable |  | € | 500 |  | € | 500 |  | Fix |  | 3.75 | % |  |  |  |  |  |  |  |  |  |  |  |  |
Payable |  | US$ | 613 |  | US$ | 613 |  | Fix |  | 4.29 | % |  |  |  |  |  |  |  |  |  |  |  |  |
Forward |  | R$ | 916 |  | R$ | 121 |  | B |  | 5.96 |  | (1) |  | — |  | — |  | 3 |  | (1) |  | — |  | —
b.ii)Protection program for Libor floating interest rate US$ denominated debt The Company has also exposure to interest rates risks over loans and financings. The US Dollar floating rate debt in the portfolio consists mainly of loans including export pre-payments, commercial banks and multilateral organizations loans. In general, such debt instruments are indexed to the LIBOR in US dollar. To reduce the cash flow volatility, swap transactions were implemented to convert Libor floating interest rate cash flows from certain debt instruments issued by the Company into fixed interest rate. In those swaps, the Company receives floating rates and pays fixed rates in US$.
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Financial |  |  |  |  |  |  |  |
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|  | Notional |  |  |  |  |  | Fair value |  | (Outflows) |  | Value at Risk |  | Fair value by year
|  | December 31, |  | December 31, |  |  |  | Average |  | December 31, |  | December 31, |  | December 31, |  | December 31, |  |  |  |  |  |
Flow |  | 2020 |  | 2019 |  | Index |  | rate |  | 2020 |  | 2019 |  | 2020 |  | 2020 |  | 2021 |  | 2022 |  | 2023+
Libor vs. US$ fixed rate swap |  |  |  |  |  |  |  |  |  |  |  | (7) |  | — |  | — |  | 1 |  | (1) |  | (1) |  | (4)
Receivable |  | US$ | 950 |  |  | — |  | Libor |  | 0.13 | % |  |  |  |  |  |  |  |  |  |  |  |  |
Payable |  | US$ | 950 |  |  | — |  | Fix |  | 0.48 | % |  |  |  |  |  |  |  |  |  |  |  |  |
c)Market risk - Product prices and input costs The Company is also exposed to market risks associated with the price volatility of commodities and inputs, especially freight and fuel costs. In line with its risk management policy, risk mitigation strategies involving commodities are used to reduce cash flow volatility. These mitigation strategies incorporate derivative instruments, predominantly forward, futures and options.
| c.i) |  | Protection program for product prices and input costs
|  |  |  |  |  |  |  |  |  |  |  |  |  | Financial |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  | settlement |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Inflows |  |  |  | Fair value
|  | Notional |  |  |  |  |  | Fair value |  | (Outflows) |  | Value at Risk |  | by year
Flow |  | December 31, 2020 |  | December 31, 2019 |  | Bought / Sold |  | Average strike (US$/bbl) |  | December 31, 2020 |  | December 31, 2019 |  | December 31, 2020 |  | December 31, 2020 |  | 2021 +
Brent crude oil (bbl) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Call options |  | 13,746,945 |  | 7,048,500 |  | B |  | 55 |  | 92 |  | 11 |  | — |  | 11 |  | 92
Put options |  | 13,746,945 |  | 7,048,500 |  | S |  | 28 |  | (12) |  | (3) |  | (68) |  | 1 |  | (12)
Gasoil (bbl) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Call options |  | — |  | 7,710,750 |  | C |  | — |  | — |  | 7 |  | — |  | — |  | —
Put options |  | — |  | 7,710,750 |  | V |  | — |  | — |  | (3) |  | (137) |  | — |  | —
Forward Freight Agreement (days) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Freight forwards (days) |  | 1,625 |  | 1,050 |  | C |  | 11,893 |  | 4 |  | — |  | (2) |  | 1 |  | 4
Brent Crude Oil and Gasoil options-In order to reduce the impact of fluctuations in fuel oil prices on the hiring and availability of maritime freight and, consequently, to reduce the Company's cash flow volatility, hedging operations were carried out through options contracts on Brent Crude Oil and Gasoil (10ppm) for different portions of the exposure. The derivative transactions were negotiated over-the-counter and the protected item is part of the costs linked to the price of fuel oil used on ships. The financial settlement inflows/outflows are offset by the protected items' losses/gains. Freight derivative-To reduce the impact of maritime freight price volatility on the Company's cash flow, freight hedging transactions were implemented, through Forward Freight Agreements (FFAs). The protected item is part of the costs linked to maritime freight spot prices. The financial settlement inflows/outflows of the FFAs are offset by the protected items' losses/gains due to freight price changes. The FFAs are contracts traded over the counter and can be cleared through a Clearing House, in this case subject to margin requirements. d)Embedded derivatives in contracts
|  |  |  |  |  |  |  |  |  |  |  |  |  | Financial |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  | settlement |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Inflows |  |  |  |
|  | Notional |  |  |  |  |  | Fair value |  | (Outflows) |  | Value at Risk |  | Fair value
|  | December 31, |  | December 31, |  | Bought/ |  | Average |  | December 31, |  | December 31, |  | December 31, |  | December 31, |  |
Flow |  | 2020 |  | 2019 |  | Sold |  | strike |  | 2020 |  | 2019 |  | 2020 |  | 2020 |  | 2021+
Warrants da Wheaton Precious Metals Corp. (quantity of warranties) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Call options |  | — |  | 10,000,000 |  | B |  | — |  | — |  | 26 |  | 25 |  | — |  | —
Stock options associated with convertible debentures (quantity) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Conversion options |  | — |  | 140,239 |  | S |  | 8,346 |  | — |  | (51) |  | 235 |  | — |  | —
Option related to a Special Purpose Entity “SPE” (quantity) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Call option |  | 137,751,623 |  | 137,751,623 |  | B |  | 2.92 |  | 18 |  | 24 |  | — |  | 2 |  | 18
Embedded derivatives in contracts for the sale of part of its shareholding (quantity) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Put option |  | 1,105,070,863 |  | 1,105,070,863 |  | S |  | 4.23 |  | (19) |  | (69) |  | — |  | 4 |  | (19)
Embedded Derivative in natural gas purchase agreement (volume/month) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Call options |  | 746,667 |  | 746,667 |  | S |  | 233 |  | — |  | (1) |  | — |  | — |  | —
Embedded in raw material purchase contract (ton) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Nickel forwards |  | 1,979 |  | 1,497 |  | S |  | 15,831 |  | 2 |  | 2 |  | — |  | 1 |  | 2
Copper forwards |  | 976 |  | 1,009 |  | S |  | 7,121 |  | — |  | — |  | — |  | — |  | —
Wheaton Precious Metals Corp. warrants-The Company owned warrants issued by Wheaton Precious Metals Corp. (WPM), a Canadian company with stocks negotiated on the Toronto Stock Exchange and the New York Stock Exchange. Such warrants have payoff similar to that of an American call option and were received as part of the payment regarding the sale of part of gold payable flows produced as a sub product from Salobo copper mine and some nickel mines in Sudbury. In February 2020, the Company sold all of its warrants of Wheaton (equivalent to 10,000,000 common shares) for US$2.50 per warrant, totaling US$25. Call options associated to debentures convertible into shares–In this contract, BNDESPar was granted call options on VLI S.A. ("VLI") shares held by Vale of up to 8% of VLI's capital stock. On December 9, 2020, the Company was notified by BNDESPar of the full exercise of the call option for shares issued by VLI. With the exercise of this option, Vale received US$241 for an 8% stake in VLI (note 14). Option related to a Special Purpose Entity "SPE"-The Company acquired in January 2019 a call option related to shares of certain special purpose entities, which are part of a wind farm located in Bahia, Brazil. This option was acquired in the context of the Company's signing of electric power purchase and sale agreements with an SPE, supplied by this wind farm. Options to purchase shares of associates-In 2014, the Company sold part of its stake in an associate to an investment fund, of which sales contract establishes, under certain conditions, a minimum return guarantee on the investment whose maturity was extended to December 2021. This is considered an embedded derivative, with payoff equivalent to a put option. Options on natural gas purchase-The Company has also a natural gas purchase agreement in which there´s a clause that defines that a premium can be charged if the Company's pellet sales prices trade above a pre-defined level. This clause is considered an embedded derivative. Nickel and copper raw materials-The Company has some nickel concentrate and raw materials purchase agreements in which there are provisions based on nickel and copper future prices behavior. These provisions are considered as embedded derivatives.
| e) |  | Sensitivity analysis of derivative financial instruments
The following tables present the potential value of the instruments given hypothetical stress scenarios for the main market risk factors that impact the derivatives positions. The scenarios were defined as follows:
| · |  | Probable: the probable scenario was defined as the fair value of the derivative instruments as at December 31, 2020
| · |  | Scenario I: fair value estimated considering a 25% deterioration in the associated risk variables
| · |  | Scenario II: fair value estimated considering a 50% deterioration in the associated risk variables
Instrument |  | Instrument’s main risk events |  | Probable |  | Scenario I |  | Scenario II
CDI vs. US$ fixed rate swap |  | R$ depreciation |  | (473) |  | (1,048) |  | (1,623)
|  | US$ interest rate inside Brazil decrease |  | (473) |  | (494) |  | (517)
|  | Brazilian interest rate increase |  | (473) |  | (496) |  | (522)
Protected item: R$ denominated liabilities |  | R$ depreciation |  | n.a. |  | — |  | —
TJLP vs. US$ fixed rate swap |  | R$ depreciation |  | (163) |  | (285) |  | (408)
|  | US$ interest rate inside Brazil decrease |  | (163) |  | (165) |  | (168)
|  | Brazilian interest rate increase |  | (163) |  | (173) |  | (182)
|  | TJLP interest rate decrease |  | (163) |  | (172) |  | (181)
Protected item: R$ denominated debt |  | R$ depreciation |  | n.a. |  | — |  | —
R$ fixed rate vs. US$ fixed rate swap |  | R$ depreciation |  | (111) |  | (264) |  | (418)
|  | US$ interest rate inside Brazil decrease |  | (111) |  | (113) |  | (115)
|  | Brazilian interest rate increase |  | (111) |  | (120) |  | (129)
Protected item: R$ denominated debt |  | R$ depreciation |  | n.a. |  | — |  | —
IPCA vs. US$ fixed rate swap |  | R$ depreciation |  | (173) |  | (343) |  | (512)
|  | US$ interest rate inside Brazil decrease |  | (173) |  | (178) |  | (183)
|  | Brazilian interest rate increase |  | (173) |  | (189) |  | (204)
|  | IPCA index decrease |  | (173) |  | (184) |  | (195)
Protected item: R$ denominated debt |  | R$ depreciation |  | n.a. |  | — |  | —
IPCA vs. CDI swap |  | Brazilian interest rate increase |  | 45 |  | 43 |  | 41
|  | IPCA index decrease |  | 45 |  | 43 |  | 40
Protected item: R$ denominated debt linked to IPCA |  | IPCA index decrease |  | n.a. |  | (43) |  | (40)
EUR fixed rate vs. US$ fixed rate swap |  | EUR depreciation |  | (1) |  | (173) |  | (346)
|  | Euribor increase |  | (1) |  | (2) |  | (3)
|  | US$ Libor decrease |  | (1) |  | (2) |  | (2)
Protected item: EUR denominated debt |  | EUR depreciation |  | n.a. |  | 173 |  | 346
US$ floating rate vs. US$ fixed rate swap |  | US$ Libor decrease |  | (7) |  | (10) |  | (13)
Protected item: Libor US$ indexed debt |  | US$ Libor decrease |  | n.a. |  | 10 |  | 13
NDF BRL/USD |  | R$ depreciation |  | (1) |  | (39) |  | (77)
|  | US$ interest rate inside Brazil decrease |  | (1) |  | (2) |  | (3)
|  | Brazilian interest rate increase |  | (1) |  | (7) |  | (13)
Protected item: R$ denominated liabilities |  | R$ depreciation |  | n.a. |  | — |  | —
Fuel oil protection |  |  |  |  |  |  |  |
Options |  | Price input decrease |  | 80 |  | 25 |  | (28)
Protected item: Part of costs linked to fuel oil prices |  | Price input decrease |  | n.a. |  | (25) |  | 28
Forward Freight Agreement |  |  |  |  |  |  |  |
Forwards |  | Freight price decrease |  | 4 |  | (2) |  | (7)
Protected item: Part of costs linked to maritime freight prices |  | Freight price decrease |  | n.a. |  | 2 |  | 7
Nickel sales fixed price protection |  |  |  |  |  |  |  |
Forwards |  | Nickel price decrease |  | (19) |  | (19) |  | (19)
Protected item: Part of nickel revenues with fixed prices |  | Nickel price decrease |  | n.a. |  | 19 |  | 19
Palladium Revenue Hedging Program |  |  |  |  |  |  |  |
Options |  | Palladium price increase |  | (1) |  | (5) |  | (9)
Protected item: Part of palladium future revenues |  | Palladium price increase |  | n.a. |  | 5 |  | 9
Option-SPCs |  | SPCs stock value decrease |  | 18 |  | 10 |  | 2
Instrument |  | Main risks |  | Probable |  | Scenario I |  | Scenario II
Embedded derivatives-Raw material purchase (nickel) |  | Nickel price increase |  | 2 |  | (5) |  | (13)
Embedded derivatives-Raw material purchase (copper) |  | Copper price increase |  | — |  | (1) |  | (3)
Embedded derivatives-Gas purchase |  | Pellet price increase |  | — |  | — |  | (1)
Embedded derivatives-Guaranteed minimum return |  | Stock value decrease |  | (19) |  | (84) |  | (270)
| f) |  | Credit risk management
The Company is exposed to credit risk arises from trade receivables, derivative transactions, guarantees, down payment for suppliers and cash investments. Our credit risk management process provides a framework for assessing and managing counterparties' credit risk and for maintaining our risk at an acceptable level. For the commercial credit exposure, which arises from sales to final customers, the risk management area, in accordance with the current delegation level, approves or requests the approval of credit risk limits for each counterparty. Vale attributes an internal credit risk rating for each counterparty using its own quantitative methodology for credit risk analysis, which is based on market prices, external credit ratings and financial information of the counterparty, as well as qualitative information regarding the counterparty's strategic position and history of commercial relations. Based on the counterparty's credit risk, risk mitigation strategies may be used to manage the Company`s credit risk. The main credit risk mitigation strategies include non-recourse sale of receivables, insurance instruments, letters of credit, corporate and bank guarantees, mortgages, among others.
| f.i) |  | Accounts receivable
Vale has a diversified accounts receivable portfolio from a geographical standpoint, with Asia, Europe and Brazil the regions with more significant exposures. According to each region, different guarantees can be used to enhance the credit quality of the receivables. In 2019 and 2018, the expected credit loss on the Company's accounts receivable portfolio is immaterial (see note 10).
| f.ii) |  | Financial instruments, except for accounts receivable
To manage the credit exposure arising from cash investments and derivative instruments, credit limits are approved to each counterparty with whom the Company has credit exposure. Furthermore, the Company controls the portfolio diversification and monitor different indicators of solvency and liquidity of the different counterparties that were approved for trading. The carrying amount of the financial assets that represent the exposure to credit risk is presented below:
|  | December 31, 2020 |  | December 31, 2019
Cash and cash equivalents |  | 13,487 |  | 7,350
Short-term investments |  | 771 |  | 826
Restricted cash |  | 38 |  | 151
Judicial deposits (note 26) |  | 1,268 |  | 3,133
Derivative financial instruments (note 19) |  | 200 |  | 472
Investments in equity securities |  | 757 |  | 726
Related parties-Loans (note 29) |  | 1,118 |  | 1,919
Total |  | 17,639 |  | 14,577
| f.iii) |  | Financial counterparties' ratings
The transactions of derivative instruments, cash and cash equivalents as well as short-term investments are held with financial institutions whose exposure limits are periodically reviewed and approved by the delegated authority. The financial institutions credit risk is performed through a methodology that considers, among other information, ratings provided by international rating agencies. The table below presents the ratings published by Moody's regarding the main financial institutions that we hire derivative instruments, cash and cash equivalents transactions.
|  | December 31, 2020 |  | December 31, 2019
|  | Cash and cash |  |  |  | Cash and cash |  |
|  | equivalents |  |  |  | equivalents |  |
|  | and |  |  |  | and |  |
|  | investment |  | Derivatives |  | investment |  | Derivatives
Aa1 |  | 2,210 |  | 36 |  | 31 |  | —
Aa2 |  | 363 |  | 15 |  | 1 |  | 11
Aa3 |  | 1,681 |  | 41 |  | 202 |  | 46
A1 |  | 2,812 |  | 21 |  | 1,468 |  | —
A2 |  | 4 |  | 20 |  | 2,740 |  | 138
A3 |  | 5 |  | 36 |  | 109 |  | 105
Baa1 |  | 4 |  | — |  | 5 |  | —
Baa2 |  | 1 |  | — |  | 47 |  | —
Baa3 |  | — |  | — |  | 1 |  | 117
Ba1 |  | 2,986 |  | — |  | — |  | —
Ba2 |  | 4,189 |  | 6 |  | 835 |  | —
Ba3 |  | — |  | — |  | 2,735 |  | —
Others |  | 3 |  | 25 |  | 2 |  | 55
|  | 14,258 |  | 200 |  | 8,176 |  | 472
| g) |  | Liquidity risk management
The liquidity risk arises from the possibility that Vale might not perform its obligations on due dates, as well as face difficulties to meet its cash requirements due to market liquidity constraints. The revolving credit facilities available today were provided by a syndicate of several global commercial banks. To mitigate liquidity risk, the Company has two revolving credit facilities, which will mature in 2022 and 2024, in the available amount of US$5,000 to assist the short term liquidity management and to enable more efficiency in cash management, being consistent with the strategic focus on cost of capital reduction. As at December 31, 2020 these lines are undrawn. Accounting policy The Company uses financial instruments to hedge its exposure to certain market risks arising from operational, financing and investing activities. Derivatives are included within financial assets or liabilities at fair value through profit or loss unless they are designated as effective hedging instruments (hedge accounting). At the beginning of the hedge operations, the Company documents the type of hedge, the relation between the hedging instrument and hedged items, its risk management objective and strategy for undertaking hedge operations. The Company also documents, both at hedge inception and on an ongoing basis that the hedge is expected to continue to be highly effective. The Company has elected to adopt the new general hedge accounting model in IFRS 9 and designates certain derivatives as either: Cash flow hedge-The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in equity within "Unrealized fair value gain (losses)". The gain or loss relating to the ineffective portion is recognized immediately in the income statement. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized in profit or loss when the transaction is recognized in the income statement. Net investment hedge-Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in equity within "Cumulative translation adjustments". The gain or loss relating to the ineffective portion is recognized immediately in the income statement. Gains and losses accumulated in equity are included in the statement of income when the foreign operation is partially or fully disposed of or sold. Derivatives at fair value through profit or loss-Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any of these derivative instruments are recognized immediately in the income statement. Critical accounting estimates and judgments The fair values of financial instruments that are not traded in active markets are determined using valuation techniques. Vale uses its own judgment to choose between the various methods. Assumptions are based on the market conditions, at the end of the year. An analysis of the impact if actual results are different from management's estimates is present under "Sensitivity analysis of derivative financial instruments".

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