BASF Report 2021 Consoli dated Financial Statements – Notes 274 26.5 Derivative financial instruments and hedging To ensure efficient risk management, risk positions are centralized at Hedge accounting relationships BASF SE and certain Group companies. The contracting and execution of derivative financial instruments for hedging purposes BASF is exposed to commodity price risks in the context of procuring The use of derivative financial instruments are conducted according to internal guidelines, and subject to strict naphtha. Some of the planned purchases of naphtha are hedged control mechanisms. using swaps and options on oil and oil products. The main BASF is exposed to foreign currency, interest rate and commodity contractual elements of these items are aligned with the price risks during the normal course of business. These risks are The fair values of derivative financial instruments are calculated characteristics of the hedged item. Cash flow hedge accounting hedged using derivative instruments as necessary in accordance using valuation models that, if available, use input parameters was employed for a portion of these hedging relationships in 2021 with a centrally determined strategy. Hedging is employed for observable on the market. Exceptions to this are some commodity and 2020. The average exercise price of the designated options existing underlying transactions from the product business, cash derivatives, whose valuation is based directly on market prices. was $675.54 per metric ton as of December 31, 2021 (Decem- investments and financing as well as for planned sales, raw material ber 31, 2020: $454.45 per metric ton). Cash flows from designated purchases and capital measures. Furthermore, hedging may also be In addition to the derivative instruments presented in the following hedging instruments and hedged transactions occur in the following used for cash flows from acquisitions and divestitures. The risks table, BASF also had derivatives that were embedded in other year and are also recognized in profit or loss for that year. from the hedged items and the derivatives are continually monitored. financial instruments. This primarily related to options embedded in Where derivatives have a positive market value, BASF is exposed to a loan on the borrower’s equity instruments. The fair value of these Furthermore, cash flow hedge accounting continued to be employed credit risks from derivative transactions in the event of nonperfor- derivatives was €33 million as of December 31, 2020. The options to a minor extent for procuring natural gas, which is likewise exposed mance of the other party. To minimize the default risk on derivatives were exercised in 2021. to commodity price risks. Commodity price-based options serve as with positive market values, transactions are exclusively conducted hedging instruments, for which contract terms are defined to reflect with creditworthy banks and partners and are subject to predefined the risks of the hedged item. Depending on where trading took credit limits. place, the average exercise price of the designated options was €32.60 per MWh or $3.74 per mmBtu as of December 31, 2021. The average exercise price of the designated options was €13.35 per MWh or $2.74 per mmBtu as of December 31, 2020. Cash Fair value of derivative instruments flows from the hedging transaction and hedged item are generally Million € recognized in profit or loss for the following year. December 31, 2021 December 31, 2020 Foreign currency forward contracts 21 10 The change in the options’ time value is recognized separately in Foreign currency options 1 35 equity as costs of transaction-related hedging and, in the year Foreign currency derivatives 22 45 during which the hedged items mature, it is initially derecognized of which designated hedging instruments as defined by IFRS 9 (hedge accounting) 0 35 against the carrying amount of the procured assets and recognized Combined interest rate and currency swaps 102 –163 in profit or loss when the assets are consumed. In 2021, a decrease in fair value of €27 million was recognized in equity, and €24 million of which designated hedging instruments as defined by IFRS 9 (hedge accounting) 179 90 was initially derecognized against the carrying amount of the Interest derivatives 102 –163 inventories procured and then recognized upon consumption in Commodity derivatives 324 –321 profit or loss. In 2020, a decrease in fair value of €17 million was a recognized as a reduction in equity, and €13 million was derecog- of which designated hedging instruments as defined by IFRS 9 (hedge accounting) 107 7 Derivative financial instruments 447 –439 nized against the carrying amount of the assets. a Of which €71 million reported in the balance sheet under assets of disposal groups