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Derivative Instruments and Accounting Hedges | 12 Months Ended
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Dec. 31, 2018
Derivative Instruments and Accounting Hedges |
Derivative Instruments and Accounting Hedges | 10. Derivative Instruments and Accounting Hedges: (a) As of December 31, 2017 and 2018, the Bank’s portfolio of derivative instruments is detailed as follows:
|  | As of December 31, 2017
|  | Notional |  |  |  |
|  | amount |  | Fair value
|  | contract |  | Asset |  | Liability
|  | MCh$ |  | MCh$ |  | MCh$
Derivatives held for hedging of fair value |  |  |  |  |  |
Cross currency swap |  | 13,914 |  | — |  | 3,652
Interest rate swap |  | 78,970 |  | 277 |  | 1,678
Total derivatives held for hedging purposes |  | 92,884 |  | 277 |  | 5,330
Derivatives held as cash flow hedges |  |  |  |  |  |
Interest rate swap and cross currency swap |  | 1,148,561 |  | 27,572 |  | 80,888
Total Derivatives held as cash flow hedges |  | 1,148,561 |  | 27,572 |  | 80,888
Derivatives held-for-trading purposes |  |  |  |  |  |
Currency forward |  | 29,451,333 |  | 506,614 |  | 574,931
Interest rate forward |  | 14,000 |  | ― |  | 206
Interest rate swap |  | 55,617,104 |  | 243,931 |  | 236,954
Cross currency swap |  | 11,281,240 |  | 466,192 |  | 490,811
Call currency options |  | 153,776 |  | 514 |  | 472
Put currency options |  | 145,873 |  | 2,841 |  | 3,403
Total derivatives held-for-trading purposes |  | 96,663,326 |  | 1,220,092 |  | 1,306,777
Total |  | 97,904,771 |  | 1,247,941 |  | 1,392,995
|  | As of December 31, 2018
|  | Notional |  |  |  |
|  | amount |  | Fair value
|  | contract |  | Asset |  | Liability
|  | MCh$ |  | MCh$ |  | MCh$
Derivatives held for hedging of fair value |  |  |  |  |  |
Cross currency swap |  | 11,132 |  | — |  | 3,012
Interest rate swap |  | 226,954 |  | 1,116 |  | 3,152
Total derivatives held for hedging purposes |  | 238,086 |  | 1,116 |  | 6,164
Derivatives held as cash flow hedges |  |  |  |  |  |
Interest rate swap and cross currency swap |  | 1,137,457 |  | 34,298 |  | 31,818
Total Derivatives held as cash flow hedges |  | 1,137,457 |  | 34,298 |  | 31,818
Derivatives held-for-trading purposes |  |  |  |  |  |
Currency forward |  | 35,690,464 |  | 735,444 |  | 631,089
Interest rate forward |  | ― |  | ― |  | ―
Interest rate swap |  | 72,330,827 |  | 287,611 |  | 284,840
Cross currency swap |  | 13,982,890 |  | 450,519 |  | 569,868
Call currency options |  | 229,175 |  | 4,839 |  | 2,921
Put currency options |  | 192,553 |  | 120 |  | 1,534
Total derivatives held-for-trading purposes |  | 122,425,909 |  | 1,478,533 |  | 1,490,252
Total |  | 123,801,452 |  | 1,513,947 |  | 1,528,234
(b) Fair Value Hedges (notional): The Bank uses cross-currency swaps and interest rate swaps to hedge its exposure to changes in the fair value of the hedged elements attributable to interest rates. The aforementioned hedge instruments change the effective cost of long-term issuances from a fixed interest rate to a variable interest rate, decreasing the duration and modifying the sensitivity to the shortest segments of the curve. Below is a detail of the hedged elements and hedge instruments under fair value hedges as of December 31, 2017 and 2018:
|  | As of December 31,
|  | 2017 |  | 2018
|  | MCh$ |  | MCh$
Notional Amounts |  |  |  |
Hedged element |  |  |  |
Commercial loans |  | 13,914 |  | 11,132
Corporate bonds |  | 78,970 |  | 226,954
Hedge instrument |  |  |  |
Cross currency swap |  | 13,914 |  | 11,132
Interest rate swap |  | 78,970 |  | 226,954
(c) Cash flow Hedges: (c.1) The Bank uses cross currency swaps to hedge the risk from variability of cash flows attributable to changes in the interest rates and foreign exchange of borrowings from banks and bonds issued abroad in US dollars, Hong Kong dollars, Swiss franc, Japanese yen and Euros. The cash flows of the cross currency swaps equal the cash flows of the hedged items, which modify uncertain cash flows to known cash flows derived from a fixed interest rate. Additionally, these cross currency swap contracts used to hedge the risk from variability of the Unidad de Fomento (CLF) in assets flows denominated in CLF until a nominal amount equal to the portion notional of the hedging instrument CLF, whose readjustment daily impact the item “interest revenue” of the financial statements. (c.2) Below are the cash flows of borrowings from banks and bonds issued abroad, the objects of these hedges and the cash flows of the asset part of the derivative:
|  |  |  |  |  | Over 1 month |  | Over 3 months |  | Over 1 year |  | Over 3 years |  |  |  |  |  |  |  |
|  |  |  |  |  | and up to 3 |  | and up to 12 |  | and up to 3 |  | and up to 5 |  |  |  |  |  |  |  |
|  | Up to 1 month |  | months |  | months |  | years |  | years |  | Over 5 years |  | Total
|  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018
|  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$
Hedge element |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Outflows: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate Bond EUR |  | — |  | — |  | — |  | — |  | (1,246) |  | (1,338) |  | (2,491) |  | (2,675) |  | (2,491) |  | (2,675) |  | (82,348) |  | (87,097) |  | (88,576) |  | (93,785)
Corporate Bond HKD |  | — |  | — |  | — |  | — |  | (11,052) |  | (66,378) |  | (68,634) |  | (21,601) |  | (19,202) |  | (83,608) |  | (298,776) |  | (263,206) |  | (397,664) |  | (434,793)
Corporate Bond CHF |  | — |  | — |  | (986) |  | (89,256) |  | (161,529) |  | (125,993) |  | (192,519) |  | (1,450) |  | (474) |  | (82,552) |  | (95,174) |  | (106,050) |  | (450,682) |  | (405,301)
Corporate Bond USD |  | — |  | — |  | — |  | — |  | — |  | (1,476) |  | — |  | (2,952) |  | — |  | (2,952) |  | — |  | (42,060) |  | — |  | (49,440)
Obligation USD |  | (212) |  | (870) |  | (235) |  | (86) |  | (93,173) |  | (49,401) |  | (43,385) |  | (105,622) |  | — |  | — |  | — |  | — |  | (137,005) |  | (155,979)
Corporate Bond JPY |  | — |  | — |  | (292) |  | (49,362) |  | (1,150) |  | (1,072) |  | (72,098) |  | (33,487) |  | (28,886) |  | (32,882) |  | (63,002) |  | (71,830) |  | (165,428) |  | (188,633)
Hedge instrument |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Inflows: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cross Currency Swap EUR |  | — |  | — |  | — |  | — |  | 1,246 |  | 1,338 |  | 2,491 |  | 2,675 |  | 2,491 |  | 2,675 |  | 82,348 |  | 87,097 |  | 88,576 |  | 93,785
Cross Currency Swap HKD |  | — |  | — |  | — |  | — |  | 11,052 |  | 66,378 |  | 68,634 |  | 21,601 |  | 19,202 |  | 83,608 |  | 298,776 |  | 263,206 |  | 397,664 |  | 434,793
Cross Currency Swap CHF |  | — |  | — |  | 986 |  | 89,256 |  | 161,529 |  | 125,993 |  | 192,519 |  | 1,450 |  | 474 |  | 82,552 |  | 95,174 |  | 106,050 |  | 450,682 |  | 405,301
Cross Currency Swap USD |  | — |  | — |  | — |  | — |  | — |  | 1,476 |  | — |  | 2,952 |  | — |  | 2,952 |  | — |  | 42,060 |  | — |  | 49,440
Cross Currency Swap USD |  | 212 |  | 870 |  | 235 |  | 86 |  | 93,173 |  | 49,401 |  | 43,385 |  | 105,622 |  | — |  | — |  | — |  | — |  | 137,005 |  | 155,979
Cross Currency Swap JPY |  | — |  | — |  | 292 |  | 49,362 |  | 1,150 |  | 1,072 |  | 72,098 |  | 33,487 |  | 28,886 |  | 32,882 |  | 63,002 |  | 71,830 |  | 165,428 |  | 188,633
Net cash flows |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | —
(c.2) Below are the cash flows of the underlying assets portfolio and the cash flow of the liability part of the derivatives:
|  |  |  |  |  | Over 1 month |  | Over 3 months |  | Over 1 year |  | Over 3 years |  |  |  |  |  |  |  |
|  |  |  |  |  | and up to 3 |  | and up to 12 |  | and up to 3 |  | and up to 5 |  |  |  |  |  |  |  |
|  | Up to 1 month |  | months |  | months |  | years |  | years |  | Over 5 years |  | Total
|  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018
|  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$ |  | MCh$
Hedge element |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Inflows: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash flows in CLF |  | — |  | — |  | 2,344 |  | 144,458 |  | 281,377 |  | 237,340 |  | 414,764 |  | 173,263 |  | 59,737 |  | 195,590 |  | 555,461 |  | 542,523 |  | 1,313,683 |  | 1,293,174
Hedge instrument |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Outflows: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cross Currency Swap HKD |  | — |  | — |  | — |  | — |  | (9,404) |  | (59,667) |  | (66,188) |  | (16,835) |  | (16,365) |  | (68,362) |  | (285,066) |  | (233,286) |  | (377,023) |  | (378,150)
Cross Currency Swap JPY |  | — |  | — |  | (1,061) |  | (50,247) |  | (3,372) |  | (2,740) |  | (85,598) |  | (37,432) |  | (35,063) |  | (35,213) |  | (77,895) |  | (78,611) |  | (202,989) |  | (204,243)
Cross Currency Swap USD |  | — |  | — |  | — |  | — |  | (111,077) |  | (47,797) |  | (44,840) |  | (107,893) |  | — |  | (1,243) |  | — |  | (36,888) |  | (155,917) |  | (193,821)
Cross Currency Swap CHF |  | — |  | — |  | (1,283) |  | (94,211) |  | (155,767) |  | (125,325) |  | (214,620) |  | (7,482) |  | (4,793) |  | (87,164) |  | (107,870) |  | (108,488) |  | (484,333) |  | (422,670)
Cross Currency Swap EUR |  | — |  | — |  | — |  | — |  | (1,757) |  | (1,811) |  | (3,518) |  | (3,621) |  | (3,516) |  | (3,608) |  | (84,630) |  | (85,250) |  | (93,421) |  | (94,290)
Net cash flows |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | —
With respect to CLF assets hedged, these are revalued monthly according to the variation of the UF, which is equivalent to monthly reinvestment of the assets until maturity of the relationship hedging. (c.3) The accumulated amount of unrealized gain was a charge to equity for an amount of Ch$30,943 million (a credit to equity for Ch$14,979 million in 2017 and a charge to equity for Ch$50,481 million in 2016) generated from hedging instruments, which has been recorded in equity. The net effect of tax was a charge to equity for Ch$22,589 million in 2018 (a credit to equity for Ch$11,158 million in 2017 and a charge to equity for Ch$38,366 million in 2016) The accumulated balance for this concept net of income tax as of December 31, 2018 corresponds to a debit of equity amounted Ch$31,983 million (a debit of equity for Ch$9,394 million in 2017 and a debit to equity for Ch$20,552 million in 2016). (c.4) The net effect in income of derivatives cash flow hedges was a credit of Ch$85,659 million in 2018 (a debit to income for Ch$93,612 million in 2017 and a debit to income for Ch$135,929 million in 2016). (c.5) As of December 31, 2018 and 2017, it not exist inefficiency in cash flow hedge, because both, hedge item and hedge instruments are mirror one of other, it means that all variation of value attributable to rate and revaluation components are netted almost totally. (c.6) As of December 31, 2018 and 2017, the Bank has no hedges of net investments in foreign businesses.

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