34.

Derivative financial instruments

Fair value of derivative financial instruments at 31 December 2018 and 2017 are attributable to the following:

31 December 2018

31 December 2017

Assets

Liabilities

Assets

Liabilities

Held for trading

709,617

131,097

961,665

17,724

Derivatives used for hedging

730,924

—

Total

1,440,541

131,097

961,665

17,724

At 31 December 2018, total held for trading derivative financial assets of TL 1,356,062 also include net accrued interest expense of TL 84,479 and total held for trading derivative financial liabilities of TL 131,097 also include net accrued interest expense of TL 34,168.

Derivatives used for hedging

Participating cross currency swap and FX swap contracts

The notional amount and the fair value of participating cross currency swap and FX swap contracts for hedging purposes at 31 December 2018 are as follows:


Buy			Sell
Currency	Notional amount		Currency	Notional amount		Fair Value		Maturity
Participating cross currency swap contracts
TL		1,650,000	EUR		500,000		208,462	23 October 2025
TL		275,850	EUR		60,000		64,670	22 April 2026
TL		435,000	USD		150,000		167,116	16 September 2020
TL		293,500	USD		100,000		108,777	16 September 2020
TL		194,000	USD		50,000		39,394	16 September 2020
TL		386,500	USD		100,000		79,688	16 September 2020
TL		113,400	USD		20,000		9,234	22 April 2026
Cross currency swap contracts
TL		123,878	RMB		202,600		53,583	22 April 2026

Derivatives used for hedge accounting financial assets							730,924

EUR 500,000 participating cross currency swap contracts includes TL 690,146 guarantees after CSA agreement.

Held for trading

Currency swap, cross currency swap and participating cross currency swap contracts

The notional amount and the fair value of currency swap, participating cross currency swap and FX swap contracts for hedging purposes at 31 December 2018 are as follows:


Buy			Sell
Currency	Notional amount		Currency	Notional amount		Fair Value			Maturity
Currency Swap
TL		266,760	USD		50,000		(3,715	)	2 January 2019
TL		266,510	USD		50,000		(3,465	)	2 January 2019
TL		719,996	USD		135,000		(9,774	)	2 January 2019
TL		212,736	USD		40,000		(2,300	)	2 January 2019
TL		265,925	USD		50,000		(2,880	)	2 January 2019
TL		1,366	USD		253		(48	)	19 March 2019
TL		4,199	USD		680		(939	)	16 January 2019
TL		5,681	USD		920		(1,277	)	22 January 2019
TL		6,040	EUR		1,000		(41	)	2 January 2019
USD		68,654	EUR		60,000		(861	)	15 January 2019
USD		11,462	EUR		10,000		(4	)	8 January 2019
Cross currency swap contracts
TL		6,159	USD		1,000		(912	)	28 January 2019
TL		6,159	USD		1,000		(910	)	24 January 2019
TL		130,488	USD		24,000		(9,365	)	20 March 2023
TL		268,200	USD		50,000		(5,791	)	14 June 2019
TL		128,436	USD		24,000		(2,652	)	19 June 2019
TL		169,368	EUR		24,000		(24,895	)	8 January 2019
TL		118,800	EUR		18,000		(22,051	)	23 September 2021
TL		111,732	EUR		18,867		1,920		14 February 2019
TL		185,100	EUR		30,000		(8,296	)	22 April 2026
TL		183,300	EUR		30,000		(8,642	)	22 April 2026
Participating cross currency swap contracts
TL		193,800	EUR		30,000		(7,148	)	16 September 2020
TL		91,700	USD		20,000		(17,051	)	22 April 2026

Total Held for trading derivative financial liabilities							(131,097	)

Held for trading


Buy			Sell
Currency	Notional amount		Currency	Notional amount		Fair Value		Maturity
Cross currency swap contracts
TL		67,410	USD		18,000		27,928	28 January 2019
TL		95,550	USD		25,000		36,751	24 January 2019
TL		52,164	USD		14,620		27,870	16 July 2019
TL		69,744	USD		19,780		38,636	22 July 2019
TL		242,873	USD		70,500		160,594	16 September 2020
TL		269,451	USD		70,500		131,437	22 December 2020
TL		191,300	USD		50,000		74,095	13 February 2019
TL		98,625	EUR		25,000		57,161	13 June 2019
TL		203,600	EUR		50,000		109,610	23 July 2019
TL		97,997	EUR		21,500		37,825	19 December 2019
TL		105,280	EUR		18,800		7,710	23 September 2021

Total held for trading derivative financial assets							709,617


Participating cross currency swap and FX swap contracts at 31 December 2017
Buy			Sell
Currency	Notional amount		Currency	Notional amount		Fair value			Maturity
USD		47,304	EUR		39,835		1,005		02 January 2018
TL		69,680	USD		20,000		6,554		27 August 2018
TL		81,480	EUR		20,000		9,965		14 December 2018
TL		95,550	USD		25,000		72		24 January 2019
TL		67,410	USD		18,000		1,498		28 January 2019
TL		98,625	EUR		25,000		17,354		13 June 2019
TL		52,164	USD		14,620		4,465		16 July 2019
TL		69,744	USD		19,780		6,996		22 July 2019
TL		203,600	EUR		50,000		27,198		23 July 2019
TL		435,000	USD		150,000		142,085		16 September 2020
TL		386,500	USD		100,000		(4,645	)	16 September 2020
TL		293,500	USD		100,000		90,071		16 September 2020
TL		242,873	USD		70,500		33,535		16 September 2020
TL		194,000	USD		50,000		(2,951	)	16 September 2020
TL		1,650,000	EUR		500,000		627,385		25 October 2025
TL		275,850	EUR		60,000		1,078		22 April 2026

Total derivative financial assets							961,665

Held for trading

At 31 December 2017, total derivative financial assets of TL 981,396 also include net accrued interest income of TL 19,731.


Participating cross currency swap and FX swap contracts at 31 December 2017
Buy			Sell
Currency	Notional amount		Currency	Notional amount		Fair value			Maturity
TL		470,232	USD		122,680		(2,465	)	2 January 2018
TL		180,023	USD		47,250		(545	)	2 January 2018
TL		141,001	USD		36,786		(726	)	3 January 2018
TL		219,162	USD		57,245		(1,043	)	4 January 2018
TL		115,022	USD		30,150		(435	)	5 January 2018
TL		17,204	USD		4,500		(284	)	10 January 2018
TL		15,916	EUR		3,500		(157	)	10 January 2018
TL		91,556	EUR		20,140		(620	)	22 January 2018
TL		137,834	EUR		30,400		(601	)	05 February 2018
TL		82,013	EUR		17,860		(1,413	)	19 February 2018
TL		1,143	EUR		250		(25	)	5 Mart 2018
TL		97,997	EUR		21,500		(2,154	)	19 December 2019
TL		269,451	USD		70,500		(5,010	)	22 December 2020

Total derivative financial liabilities							(15,478	)

Currency forward contracts at 31 December 2017
Buy
Currency			Notional amount			Fair value			Maturity
USD			50,000				(2,246	)	30 January 2018

Total derivative financial liabilities							(2,246	)

At 31 December 2017, total derivative financial liabilities of TL 110,108 also include net accrued interest expense of TL 92,384.

Fair value of derivative instruments and risk management

This section explains the judgements and estimates made in determining the fair values of the financial instruments that are recognized and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Group has classified its financial instruments into the three levels prescribed under the accounting standards. An explanation of each level is as follows:

•

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

•

Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

•

Level 3 inputs are unobservable inputs for the asset or liability.


	Fair values
	31 December 2018			31 December 2017			Fair Value hierarchy		Valuation Techniques
a)Participating cross currency swap contracts (*)		653,142			950,862			Level 3	Pricing models based on discounted cash Present value of the estimated future cash flows based on unobservable yield curves and end period FX rates
-Held for trading		(24,199	)		950,862
-Derivatives used for hedging		677,341			—
b)FX swap contracts		656,302			(4,675	)		Level 2	Present value of the estimated future cash flows based on observable yield curves and end period FX rates
-Held for trading		602,719			(4,675	)
-Derivatives used for hedging		53,583			—
c)Currency forward contracts		—			(2,246	)		Level 2	Forward exchange rates at the balance sheet date
-Held for trading		—			(2,246	)

(*)

TL 118,647 accrual of net interest expense has been reflected to consolidated financial statements as at 31 December 2018 (31 December 2017: TL 72,653). Since bid-ask spread is unobservable input; in valuation of participating cross currency swap contracts, prices in bid- ask price range which were considered the most appropriate were used instead of mid prices. If mid prices were used in the valuation the fair value of participating cross currency swap contracts would have been TL 123,995 lower as at 31 December 2018 (31 December 2017: TL 129,870).

There were no transfers between fair value hierarchy levels during the year.

The following table presents the Group’s financial assets and financial liabilities measured and recognised at fair value at 31 December 2018 and 2017 on a hedge accounting basis:


Fair values
Participating cross currency swap contracts	Nominal Value		Maturity Date		31 December 2018		31 December 2017		Fair Value hierarchy		Hedge Ratio		Change in intrinsic value of outstanding hedging instruments since 1 July		Change in value of hedging item used to determine hedge effectiveness
EUR Contracts		500,000		23 October 2025		208,462		627,385		Level 3		1:1		359,400		(359,400	)
EUR Contracts		60,000		22 April 2026		64,670		1,078		Level 3		1:1		43,128		(43,128	)
															—
USD Contracts		400,000		16 September 2020		394,975		224,560		Level 3		1:1		179,388		(179,388	)
USD Contracts		20,000		10 April 2026		9,234		—		Level 3		1:1		13,519		(13,519	)
CNY Contracts		202,600		22 April 2026		53,583		—		Level 2		1:1		15,600		(15,600	)

EUR 500,000 participating cross currency swap contracts includes TL 690,146 guarantees after CSA agreement.

Movements in the participating cross currency swap contracts for the years ended 31 December 2018 and 31 December 2017 are stated below:


	31 December 2018			31 December 2017
Opening balance		950,862			382,054
Cash flow effect		(612,466	)		—
Total gain/loss:
Gains recognized in profit or loss		314,746			568,808

Closing balance		653,142			950,862

Net off / Offset

The Company signed a Credit Support Annex (CSA) against default risk of the parties in respect of a EUR 500,000 participating cross currency swap transaction executed on 15 July 2016 and restructured respectively on 26 May 2017 and 9 August 2018. As per the CSA, the swap’s current (mark-to-market) value will be determined on the 10th and 24th calendar day of each calendar month and if the mark-to-market value is positive and exceeds a certain threshold, the bank will be posting cash collateral to the Company which will be equal to an amount exceeding the threshold (i.e. if the mark-to-market value is negative, the Company would be required to post collateral to the bank by an amount exceeding the threshold).

With respect to the valuations on a bi-weekly basis, a transfer will take place between the parties only if the mark-to-market value changes by at least EUR 1,000. Following the execution of CSA, the bank transferred EUR 153,540 as collateral to the Company (31 December 2018: TL 925,539) which was the amount exceeding the threshold (EUR 10,000) and the Company transferred EUR 39,050 as collateral to the bank (31 December 2018: TL 235,393) which was the amount exceeding the threshold (EUR 10,000). The Company clarified this with the derivative assets included in the statement of financial position because it has the legal right to offset the collateral amount TL 690,146 that it recognizes under the borrowings and intends to pay according to the net fair value. This amount was netted from the borrowings and deducted from the derivative instruments in the balance sheet. As of 31 December 2018, If this transaction was not conducted, derivative financial instruments assets would have been TL 2,046,208 and current borrowings would have been TL 7,726,055.

Market risk

The Group uses various types of derivatives to manage market risks. All such transactions are carried out within the guidelines set by the treasury and risk management department. Generally, the Group seeks to apply hedge accounting to manage volatility in profit or loss.

Currency risk

The Group’s risk management policy is to hedge its estimated foreign currency exposure in respect of borrowing payments with various maturities at any point in time. The Group uses participating cross currency contracts to hedge its currency risk, most with a maturity of more than one year from the reporting date. These contracts are generally designated as cash flow hedges.

The Group designates the hedge ratio, between the amount of hedged item and the hedging instrument is 1:1 to hedge its currency risk.

The time value of options in participating cross currency swap contracts are included in the designation of the hedging instrument and are separately accounted for as a cost of hedging, which is recognised in equity in a cost of hedging reserve. The Group’s policy is for the critical terms of the participating cross currency contracts to align with the hedged item.

The Group determines the existence of an economic relationship between the hedging instruments and hedged item based on the currency, amount and timing of their respective cash flows. The Group assesses whether the derivative designated in each hedging relationship is expected to be and has been effective in offsetting changes in cash flows of the hedged item using the hypothetical derivative method.

In these hedge relationships, the main sources of ineffectiveness are;

•

the effect of the counterparties’ credit risk on the fair value of the swap contracts, which is not part of the hedged risk and associated credit risk considered to be very low at inception in the fair value of the hedged cash flows attributable to the change in exchange rates;

•

the entire fair value of the derivative contracts including currency basis was designated as the hedging instrument in cash flow hedge. The hypothetical derivative is modelled to exclude the impact of currency basis.

Interest rate risk

The Group adopts a policy of ensuring that its interest rate risk exposure is at a fixed rate. This is achieved partly by entering into fixed-rate instruments and partly by borrowing at a floating rate and using cross currency and interest rate swaps as hedges of the variability in cash flows attributable to movements in interest rates. The Group applies a hedge ratio of 1:1.

The Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the reference interest rates, tenors, repricing dates and maturities and the notional or par amounts.

The Group assesses whether the derivative designated in each hedging relationship is expected to be effective in offsetting changes in cash flows of the hedged item using the hypothetical derivative method.

In these hedge relationships, the main sources of ineffectiveness are:

•

Cash flow sensitivity analysis for variable-rate instruments

A reasonably possible change of 100 basis points in interest rates and 10 % change in foreign exchange currency at the reporting date would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, remain constant.


	Profit or Loss				Equity, net of tax
	100 bp increase		100 bp decrease		100 bp increase			100 bp decrease
31 December 2018
Participating cross currency swap contracts		937,845		9,455		(360,596	)		(259,066	)
Cross currency swap contracts		31,584		320		1,452			4,765

Cash Flow sensitivity (net)		969,429		9,775		(359,144	)		(254,301	)

Cash flow hedges

The following table provides a reconciliation by risk category of components of equity and analysis of OCI items, net of tax, resulting from cash flow hedge accounting.


	2018
	Hedging Reserve			Cost of Hedging Reserve
Balance at 1 January 2018		—			—
Cash Flow Hedges
Changes in fair value:		683,706			(448,833	)
Foreign currency risk		612,733			(448,833	)
Interest rate risk		70,973			—
Amount reclassified into profit or loss:		(664,550	)		101,231
Foreign currency risk		(611,035	)		101,231
Interest rate risk		(53,515	)		—
Tax on movements during the year:		(4,214	)		76,472

Balance at 31 December 2018		14,942			(271,130	)