8 Derivatives and Hedge Accounting

Derivatives

Derivatives held for risk management purposes

Derivatives held for risk management purposes primarily comprise derivatives that share a risk with other financial instruments and give rise to opposite changes in fair value that tend to offset each other (“economic hedges”). The timing of the offset does not match in all cases.

To manage the risks associated with derivative activity, the Group establishes and monitors exposure and risk limits. Exposure to price risk on both derivatives and their underlying instruments is managed in accordance with risk limits set by risk committees for buying or selling instruments or closing out positions. The risks arise from open positions in interest rates, currencies and equity instruments, all of which are exposed to general and specific market movements.

Derivatives designated and accounted for as hedging instruments

Derivatives designated and accounted for as hedging instruments comprise derivatives associated with fair value hedges, cash flow hedges and net investment hedges in a foreign operation that qualify for hedge accounting.

Hedge accounting

As at 31 December 2025 and 31 December 2024, no hedge accounting relationships were in place.

Foreign currency risk is managed on an overlay basis. The hedged risk is defined as the fair value changes due to changes in foreign currency rates of net investments in a foreign operation. The hedged items include consolidated fixed-income funds, balanced funds, real estate funds and infrastructure funds, of which the full or partial net asset value is hedged. Foreign currency forward contracts and foreign currency borrowings are used as hedging instruments. The hedge nominal amount of the foreign currency forward or the designated borrowing matches the net asset value of the investment in the foreign operation. Only the change in fair value of the spot element of the forward contract is designated as a hedging instrument. Therefore, no hedge ineffectiveness arises.

Derivatives designated as hedging instruments as at 31 December 2025

Derivatives designated as hedging instruments as at 31 December 2024

Foreign currency borrowings designated as hedging instruments

Due to redemption in 2025 of the foreign currency borrowings designated as hedging instruments, no hedge accounting was applied as at 31 December 2025.

The risk management strategy and objective of the cash flow hedges is to hedge the interest income of bonds that are expected to be purchased at a future date. Forward starting interest rate receiver swaps and forward bonds are used as hedging instruments. The hedged items are forecasted future bond purchases that are expected to occur with high probability. Future interest income earned on these purchased bonds is hedged with either interest rate receiver swaps or forward bonds. In relation to the swaps, this implies that the accumulated gains or losses on the swaps are closely related to the change in interest income to be earned on the purchased bonds in the future. Amortisation of the accumulated gains or losses of the swaps to profit or loss closely matches the change in interest income of the bonds. In the case of forward bonds, the existence of an economic relationship is inherently assumed as a particular bond is the underlying in a forward bond transaction.

When using swaps as hedging instruments, the bonds that are to be purchased and the timing of the purchases must fulfil specific requirements such as a specified amount, maturity date, currency and rating, and must be compatible with the terms of the swaps to a large extent. This ensures that the interest income of a future bond purchase is consistent with the fair value changes of the swap and no significant hedge ineffectiveness is to be expected. In the case of forward bonds, there is no inherent hedge ineffectiveness as a specific bond is the underlying in a forward bond transaction.

Cash flow hedges: designated hedged items – interest rate risk

Cash flow hedges: timing of notional amounts of the hedging instruments – interest rate risk

Hedges of net investments in foreign operations – foreign currency risk