UPM Annual Report 2019

Net fair values of derivatives

In currency cash flow hedging, the hedging instrument is made in the same currency as the hedged item and hence the fair value change of the hedging instrument are expected to effectively offset the fair value changes generated by the hedged items. Thereby the hedge ratio between the instrument and the cash flow is 1:1. Ineffectiveness may arise in the highly unlikely case that the forecasted cash flows are no longer expected to occur. There are no other significant sources of ineffectiveness that can reasonably be expected to take place. Ineffectiveness in electricity price hedges may arise in the highly unlikely case that the forecasted cash flows are no longer expected to occur. Ineffectiveness may also arise in case EPAD prices remained negative for a longer period of time, but considering historical price development UPM considers this scenario to be highly unlikely. Hedges of net investments in foreign subsidiaries The fair value changes of forward exchange contracts used in hedging net investments that reflect the change in spot exchange rates are recognised in other comprehensive income within translation reserve. Any gain or loss relating to the interest portion of forward exchange contracts is recognised immediately in the income statement under financial items. Gains and losses accumulated in equity are included in the income statement when the foreign operation is partially disposed of or sold. The hedging instrument is always made in the same currency as the hedged investment, hence the hedge ratio in net investment hedging is 1:1. For hedging of net investments, ineffectiveness may only arise in the highly unlikely situation where the hedged item is disposed or sold during the duration of the hedging instrument. Fair value hedges The group applies fair value hedge accounting for hedging fixed interest risk on debt. Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are prospectively highly effective are recorded in the income statement under financial items, along with any changes in the fair value of the hedged asset or liabilities that are attributable to the hedged risk. The carrying amounts of hedged items and the fair values of hedging instruments are included in interest-bearing assets or liabilities. Derivatives that are designated and qualify as fair value hedges mature at the same time as hedged items. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to profit or loss over the expected period to maturity. Ineffectiveness in fair value hedge of fixed interest risk may arise in case of early redemption of such debt, which is hedged under fair value hedge accounting. The group has not recognised other significant sources of ineffectiveness that can reasonably be expected to take place. The group applies fair value hedge accounting also for hedging firm commitment of a purchase in foreign currency. The currency changes of the hedging instrument are recorded through profit and loss in financial items, until they are recognised as a part of the acquisition cost of a fixed asset.

Financial counterparty risk

Positive fair values

Negative fair values

Positive fair values

Negative fair values

Net fair values

Net fair values

The financial instruments the group has agreed with banks and financial institutions contain an element of risk of the counterparties being unable to meet their obligations. According to the Group Treasury Policy derivative instruments and investments of cash funds may be made only with counterparties meeting certain creditworthiness criteria. The group minimises counterparty risk also by using a number of major banks and financial institutions. Creditworthiness of counterparties is constantly monitored by Treasury and Risk Management.

EURm

2019

2018

Foreign exchange risk Forward foreign exchange contracts Cash flow hedges

11

-21

-10

6

-30 -26

-24 -26

Net investment hedge Non-qualifying hedges Cross currency swaps Non-qualifying hedges

1 6

-1 -7

— -1

—

9

-9

—

7

—

7

2

—

2

25

-29

-4

17

-65

-49

Derivatives hedging foreign exchange risk

Interest rate risk Interest rate swaps Fair value hedges

103

— —

103

83

— -1

83

Non-qualifying hedges

1

1

1

—

Cross currency swaps Fair value hedges

51

— — —

51

50

— — -1

50

Non-qualifying hedges

—

—

3

3

156

156

138

137

Derivatives hedging interest risk

Commodity risk Electricity sales

Cash flow hedges Electricity purchase Cash flow hedges

1

-5

-4

2

-12

-10

23

-2

21

104

-2

102

Other commodities Non-qualifying hedges

2

— -7

2

1

—

1

26

19

107 262

-14 -81

93

Derivatives hedging commodity risk

206

-36

170

181

Total

No derivatives are subject to offsetting in the group’s financial statements. All derivatives are under ISDA or similar master netting agreement.

Notional amounts of derivatives

Net fair values of derivatives calculated by counterparty

POSITIVE FAIR VALUES

NEGATIVE FAIR VALUES

NET FAIR VALUES

2019

2018 1,129

EURm

EURm 2019 2018

Interest rate forward contracts

1,729

188 245

-17 -64

171 181

Interest rate swaps

334

753

Forward foreign exchange contracts

2,491

2,524

Currency options

24

52

Cross currency swaps Commodity contracts

172 913

167

1,189

Cash collaterals pledged for derivative contracts totalled EUR 20 million of which EUR 19 million relate to commodity contracts and EUR 1 million to interest rate forward contracts.

192

193

UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

FINANCIAL STATEMENTS

FINANCIAL STATEMENTS