Annual Report 2010 - Enel.com

are conducted within the framework of formal governance
rules that establish strict risk limits. Compliance with
the limits is verified daily by units that are independent of
those undertaking the transactions. In 2010, the risk limits
for Enel’s proprietary trading are set in terms of Value-at-
Risk over a 1-day time horizon and a confidence level of
95%; the sum of the limits is equal to about €22 million.
The following section reports the scale of transactions in
derivatives outstanding at December 31, 2010, specifying
the fair value and notional amount of each class of instrument
as calculated at the year-end exchange rates provided
by the European Central Bank where denominated in
currencies other than the euro.
Fair value is determined using the official prices for instruments
traded on regulated markets. The fair value of instruments
not listed on regulated markets is determined
using valuation methods appropriate for each type of financial
instrument and market data as of the close of the
period (such as interest rates, exchange rates, volatility),
discounting expected future cash flows on the basis of the
market yield curve at the balance sheet date and translating
amounts in currencies other than the euro using
year-end exchange rates provided by the European Central
Bank.
Where possible, contracts relating to commodities are
measured using market prices related to the same instruments
on both regulated and other markets.
The measurement criteria adopted for open derivatives
positions at the end of the year were unchanged with respect
to those used at the end of the previous year. The
impact of such measurements on profit or loss and shareholders’
equity are therefore attributable solely to normal
market developments.
The notional amount of a derivative contract is the
amount on the basis of which cash flows are exchanged.
This amount can be expressed as a value or a quantity
(for example tons, converted into euro by multiplying the
notional amount by the agreed price). Amounts denominated
in currencies other than the euro are converted into
euro at the exchange rate prevailing at the balance sheet
date.
The notional amounts of derivatives reported here do not
necessarily represent amounts exchanged between the
parties and therefore are not a measure of the Company’s
credit risk exposure.
The financial assets and liabilities associated with derivative
instruments are classified as:
172 Enel Annual Report 2010 Consolidated financial statements
> cash flow hedge derivatives, related to hedging the
risk of changes in cash flows associated with long-term
floating-rate borrowings, hedging the exchange rate
risk associated with the provisioning of fuels priced in
foreign currencies, hedging revenues from the sale of
electricity under a number of contracts entered into by
Enel (two-way contracts for differences and other energy
derivatives) and hedging the risk of changes in the
prices of coal and oil commodities;
> fair value hedge derivatives, related to hedging the exposure
to changes in the fair value of an asset, liability
or firm commitment attributable to a particular risk;
> derivatives hedging net investments in foreign operations
from the translation risk in respect of the consolidation
of equity investments denominated in a foreign
currency;
> trading derivatives associated with proprietary trading
in commodities or hedging interest and exchange rate
risk or commodity risk which it would be inappropriate
to designate as cash flow hedges/fair value hedges or
which do not meet the formal requirements of IAS 39.
Interest rate risk
The twin objectives of reducing the amount of debt subject
to changes in interest rates and of containing borrowing
costs is pursued with the use of a variety of derivatives
contracts, notably interest rate swaps, interest rate options
and swaptions. The term of such contracts does not
exceed the maturity of the underlying financial liability, so
that any change in the fair value and/or cash flows of such
contracts is offset by a corresponding change in the fair
value and/or cash flows of the underlying position.
Interest rate swaps normally provide for the periodic exchange
of floating-rate interest flows for fixed-rate interest
flows, both of which are calculated on the basis of the
notional principal amount.
Interest rate options involve the exchange of interest
differences calculated on a notional principal amount
once certain thresholds (strike prices) are reached. These
thresholds specify the effective maximum rate (cap) or the
minimum rate (floor) on the debt as a result of the hedge.
Hedging strategies can also make use of combinations of
options (collars) that establish the minimum and maximum
rates at the same time. In this case, the strike prices
are normally set so that no premium is paid on the contract
(zero cost collars).
Such contracts are normally used when the fixed interest
rate that can be obtained in an interest rate swap is