Nokia 2010 Annual Report Download - page 263

35. Risk Management (Continued)
are specific risk management policies covering, for example treasury and customer related credit
risks.
Financial risks
The objective for Treasury activities in Nokia is twofold: to guarantee costefficient funding for the
Group at all times, and to identify, evaluate and hedge financial risks. There is a strong focus in Nokia
on creating shareholder value. Treasury activities support this aim by: i) mitigating the adverse effects
caused by fluctuations in the financial markets on the profitability of the underlying businesses; and
ii) managing the capital structure of the Group by prudently balancing the levels of liquid assets and
financial borrowings.
Treasury activities are governed by policies approved by the CEO. Treasury Policy provides principles
for overall financial risk management and determines the allocation of responsibilities for financial
risk management in Nokia. Operating Procedures cover specific areas such as foreign exchange risk,
interest rate risk, use of derivative financial instruments, as well as liquidity and credit risk. Nokia is
risk averse in its Treasury activities.
(a) Market Risk
Foreign exchange risk
Nokia operates globally and is thus exposed to foreign exchange risk arising from various currencies.
Foreign currency denominated assets and liabilities together with expected cash flows from highly
probable purchases and sales contribute to foreign exchange exposure. These transaction exposures
are managed against various local currencies because of Nokia’s substantial production and sales
outside the Euro zone.
According to the foreign exchange policy guidelines of the Group, which remains the same as in the
previous year, material transaction foreign exchange exposures are hedged unless hedging would be
uneconomical due to market liquidity and/or hedging cost. Exposures are defined using nominal
values of the transactions, except for foreign exchange options where the risk is measured using
options’ delta. Exposures are mainly hedged with derivative financial instruments such as forward
foreign exchange contracts and foreign exchange options. The majority of financial instruments
hedging foreign exchange risk have a duration of less than a year. The Group does not hedge
forecasted foreign currency cash flows beyond two years.
Since Nokia has subsidiaries outside the Euro zone, the eurodenominated value of the shareholders’
equity of Nokia is also exposed to fluctuations in exchange rates. Equity changes resulting from
movements in foreign exchange rates are shown as a translation difference in the Group
consolidation.
Nokia uses, from time to time, foreign exchange contracts and foreign currency denominated loans to
hedge its equity exposure arising from foreign net investments.
F75
Notes to the Consolidated Financial Statements (Continued)