DERIVATIVE FINANCIAL INSTRUMENTS

The company’s activities expose it to a variety of financial risks, including market risk (i.e. currency risk, interest rate risk and other price risk), credit risk and liquidity risk. The company selectively uses derivative financial instruments principally to manage these risks.

The aggregate notional amount of the company’s derivative positions at December 31, 2019 and 2018 is as follows:



AS AT DEC. 31 (MILLIONS)	Note	2019		2018
Foreign exchange	(a)	$	37,334	$	33,298
Interest rates	(b)	51,619		38,490
Credit default swaps	(c)	39		56
Equity derivatives	(d)	2,517		1,375

Commodity instruments	(e)	2019		2018
Energy (GWh)		25,136		14,752
Natural gas (MMBtu – 000’s)		78,364		63,076


a)	Foreign Exchange

The company held the following foreign exchange contracts with notional amounts at December 31, 2019 and 2018:



	Notional Amount (U.S. Dollars)				Average Exchange Rate
(MILLIONS)	2019		2018		2019	2018
Foreign exchange contracts
Canadian dollars	$	6,839	$	4,959	0.75	0.76
British pounds	7,874		4,952		1.27	1.32
European Union euros	2,069		3,829		1.16	1.21
Australian dollars	3,989		3,781		0.71	0.74
Indian rupee	240		697		73.55	72.73
Chilean peso	548		615		722.08	647.37
Korean won¹	687		561		1,173	1,102
Chinese yuan¹	1,862		543		5.42	6.85
Japanese yen¹	111		404		104.58	104.45
Colombian pesos¹	534		370		3,416	2,977
Brazilian reais	484		78		0.24	0.24
Swedish krona	1,578		94		9.10	7.87
Other currencies	584		436		various	various
Cross currency interest rate swaps
Canadian dollars	4,493		4,167		0.77	0.75
European Union euros	103		1,914		1.09	1.06
Australian dollars	2,033		1,454		0.98	1.00
Japanese yen¹	18		750		110.00	113.32
British pounds	267		257		1.49	1.49
Colombian pesos¹	100		125		3,463	3,056
Other currencies	—		15		—	Various
Foreign exchange futures
Brazilian reais	38		—		0.25	—
Foreign exchange options
British pounds	1,338		1,736		1.43	1.31
Chinese yuan	—		500		—	7.10
Indian rupee	—		500		—	67.95
European Union euros	1,544		463		1.12	1.15
Other currencies	—		98		—	Various


1.	Average rate is quoted using USD as base currency.

Included in net income are unrealized net gains on foreign currency derivative contracts amounting to $201 million (2018 – $457 million) and included in the cumulative translation adjustment account in other comprehensive income are losses in respect of foreign currency contracts entered into for hedging purposes amounting to $409 million (2018 – gains of $1.3 billion).


b)	Interest Rates

At December 31, 2019, the company held interest rate swap and forward starting swap contracts having an aggregate notional amount of $25.0 billion (2018 – $13.9 billion), interest rate swaptions with an aggregate notional amount of $nil (2018 – $5.3 billion) and interest rate cap contracts with an aggregate notional amount of $26.6 billion (2018 – $19.3 billion).


c)	Credit Default Swaps

As at December 31, 2019, the company held credit default swap contracts with an aggregate notional amount of $39 million (2018 – $56 million). Credit default swaps are contracts which are designed to compensate the purchaser for any change in the value of an underlying reference asset, based on measurement in credit spreads, upon the occurrence of predetermined credit events. The company is entitled to receive payments in the event of a predetermined credit event for up to $nil (2018 – $56 million) of the notional amount and could be required to make payments in respect of $nil (2018 – $nil) of the notional amount.


d)	Equity Derivatives

At December 31, 2019, the company held equity derivatives with a notional amount of $2.5 billion (2018 – $1.4 billion) which includes $541 million (2018 – $1.1 billion) notional amount that hedges long-term compensation arrangements. The balance represents common equity and ETF positions established in connection with the company’s investment activities. The fair value of these instruments was reflected in the company’s consolidated financial statements at year end.


e)	Commodity Instruments

The company has entered into energy derivative contracts primarily to hedge the sale of generated power. The company endeavors to link forward electricity sale derivatives to specific periods in which it expects to generate electricity for sale. All energy derivative contracts are recorded at an amount equal to fair value and are reflected in the company’s consolidated financial statements. The company has financial contracts outstanding on 78,364,000 MMBtu’s (2018 – 63,076,000 MMBtu’s) of natural gas as part of its electricity sale price risk mitigation strategy.

Other Information Regarding Derivative Financial Instruments

The following table classifies derivatives elected for hedge accounting during the years ended December 31, 2019 and 2018 as either cash flow hedges or net investment hedges. Changes in the fair value of the effective portion of the hedge are recorded in either other comprehensive income or net income, depending on the hedge classification, whereas changes in the fair value of the ineffective portion of the hedge are recorded in net income:



	2019							2018
FOR THE YEARS ENDED DEC. 31 (MILLIONS)	Notional		Effective Portion			Ineffective Portion		Notional		Effective Portion		Ineffective Portion
Cash flow hedges¹	$	32,709	$	(89	)	$	20	$	24,999	$	38	$	(3	)
Net investment hedges	22,790		(433		)	16		17,319		999		9
	$	55,499	$	(522	)	$	36	$	42,318	$	1,037	$	6


1.	Notional amount does not include 14,485 GWh, 12,164 MMBtu – 000’s and 2,273 bbls – millions of commodity derivatives at December 31, 2019 (2018 – 6,040 GWh, 8,423 MMBtu – 000’s and 3,151 bbls – millions).

The following table presents the change in fair values of the company’s derivative positions during the years ended December 31, 2019 and 2018, for derivatives that are fair valued through profit or loss, and derivatives that qualify for hedge accounting:



(MILLIONS)	Unrealized Gains During 2019		Unrealized Losses During 2019			Net Change During 2019			Net Change During 2018
Foreign exchange derivatives	$	419	$	(218	)	$	201		$	457
Interest rate derivatives	43		(264		)	(221		)	(17		)
Credit default swaps	—		(1		)	(1		)	3
Equity derivatives	24		(11		)	13			(129		)
Commodity derivatives	56		(29		)	27			(66		)
	$	542	$	(523	)	$	19		$	248

The following table presents the notional amounts underlying the company’s derivative instruments by term to maturity as at December 31, 2019 and 2018, for derivatives that are classified as fair value through profit or loss, and derivatives that qualify for hedge accounting:



	2019								2018
AS AT DEC. 31 (MILLIONS)	<1 Year		1 to 5 Years		>5 Years		Total Notional Amount		Total Notional Amount
Fair value through profit or loss
Foreign exchange derivatives	$	5,986	$	1,803	$	157	$	7,946	$	9,303
Interest rate derivatives	8,293		13,402		1,036		22,731		16,621
Credit default swaps	10		29		—		39		56
Equity derivatives	1,589		928		—		2,517		1,375
Commodity instruments
Energy (GWh)	1,997		8,655		—		10,652		8,712
Natural gas (MMBtu – 000’s)	66,200		—		—		66,200		54,653
Elected for hedge accounting
Foreign exchange derivatives	$	15,935	$	12,333	$	1,119	$	29,387	$	23,995
Interest rate derivatives	6,489		18,405		3,994		28,888		21,869
Equity derivatives	—		—		—		—		—
Commodity instruments
Energy (GWh)	7,880		4,596		2,009		14,485		6,040
Natural gas (MMBtu – 000’s)	12,164		—		—		12,164		8,423