Risk management (hedging) instruments and off-balance sheet risks. Clariant uses forward foreign exchange rate and option contracts, currency options as well as other financial instruments to hedge the Group’s risk exposure to volatility in interest rates, currencies and prices and to manage the return on cash and cash equivalents. Risk exposures from existing assets and liabilities as well as anticipated transactions are managed centrally.

Interest rate management. It is the Group’s policy to manage the costs of interest using fixed and variable rate debt and interest-related derivatives.

Foreign exchange management. To manage the exposure to the fluctuations in foreign currency exchange rates, the Group follows a strategy of hedging both balance sheet and revenue risk, partially through the use of forward contracts and currency swaps in various currencies. In order to contain costs, the Group does not hedge the entire exposure.

The following tables show the contract or underlying principal amounts and the respective fair value of derivative financial instruments by type at the year-end.

The contract or underlying principal amounts indicate the volume of business outstanding at the balance sheet date and do not represent the amount at risk.

The fair value of these derivative financial instruments is recorded in Other current assets in the balance sheet in the case of a positive value or in Current financial debts in the case of a negative value and if the instruments expire within the next twelve months.

If the remaining lifetime exceeds twelve months, the value is recorded in Financial assets in case it is positive and in Non-current financial debts in case it is negative.

In 2015, Clariant issued four certificates of indebtedness amounting to EUR 300 million (see note 18). EUR 150 million were paid back in 2020. As per 31 December 2020 EUR 150 million were designated as a hedge of a net investment in some of Clariant’s European subsidiaries. The unrealized foreign exchange rate gain resulting from the translation of these certificates of indebtedness into Swiss francs amounted to CHF 0.7 million for 2020 (2019: CHF 11 million gain) and is recorded in the cumulative translation difference in shareholders’ equity.

In 2016, Clariant issued seven certificates of indebtedness amounting to EUR 395 million and two certificates of indebtedness amounting to USD 277 million (see note 18). As per 1 January 2019 EUR 55.5 million of these certificates of indebtedness were dedesignated. EUR 156.5 million were paid back in 2020. As per 31 December 2020 EUR 238.5 million of these certificates were designated as a hedge of a net investment in some of Clariant’s European subsidiaries and USD 277 million in some US-American subsidiaries. The unrealized foreign exchange rate result calculated from the translation of these certificates of indebtedness into Swiss francs amounted to a gain of CHF 0.8 million (2019: CHF 14 million gain) for the EUR positions and to a gain of CHF 23 million (2019: CHF 5 million gain) for the USD positions and is recorded in the cumulative translation difference in shareholders’ equity.

In 2018, Clariant issued four certificates of indebtedness amounting to EUR 265 million (see note 18). EUR 112.5 million of these certificates were designated as a hedge of a net investment in some of Clariant’s European subsidiaries. The rest of EUR 152.5 million were exchanged with a Cross Currency Swap into CHF. The unrealized foreign exchange rate result calculated from the translation of the certificates of indebtedness into Swiss francs amounted in 2020 to a gain of CHF 0.5 million (2019: CHF 5 million gain) and is recorded in the cumulative translation difference in shareholders’ equity.

In 2020, Clariant issued five certificates of indebtedness amounting to EUR 197.5 million and CHF 62.5 million (see note 18). The EUR denominated certificates were designated as a hedge of a net investment in some of Clariant’s European subsidiaries. The unrealized foreign exchange rate result calculated from the translation of the certificates of indebtedness into Swiss francs amounted to a loss of CHF 3.4 million and is recorded in the cumulative translation difference in shareholders’ equity. On the disposal of the BU Masterbatches CHF 29 million of exchange rate gains incurred on hedges of net investment in a foreign entity were recycled to the income statement.

Clariant is hedging the interest rate risk resulting from the certificates of indebtedness in the amount of USD 277 million issued at a variable interest rate. For this purpose interest rate swaps amounting to USD 166 million have been established in 2018. Their clean price amounted to a negative CHF 0.9 million in 2020 (2019: positive CHF 1.5 million). They are accounted for as a cash flow hedge and as a consequence the result was recorded in other comprehensive income.

The hedge effectiveness is assessed at the beginning of the hedging relationship, and by recurring prospective effectiveness tests. Thus it is ensured that there exists an economic relationship between the underlying transaction and the hedging instrument.

The group enters into interest rate and cross currency swaps that have identical critical terms as the hedged item, such as reference rate, reset dates, payment dates, maturities and notional amount. The group does not hedge 100% of its loans, therefore the hedged item is identified as a proportion of the outstanding loans up to the notional amount of the swaps. As all critical terms matched during the year, the economic relationship was 100% effective.

Hedge ineffectiveness for interest rate/cross currency swaps is assessed using the following principles: The focus is on the credit value/debit value adjustment on the interest rate/cross currency swaps which is not matched by the loan, and differences in critical terms between the interest rate/cross currency swaps and loans.

The Cross Currency Basis Spread as per End of December 2020 was CHF 66 665 (2019: CHF 887 091).

There was no ineffectiveness during 2020 in relation to the interest rate/cross currency swaps. Clariant has chosen the cost of hedging approach for the newly entered cash flow hedging relationship. The cross-currency basis spread is not part of the hedging relationship.