Nokia 2010 Annual Report Download - page 265

35. Risk Management (Continued)
At the reporting date, the interest rate profile of the Group’s interestbearing assets and liabilities is
presented in the table below:
Fixed rate Floating rate Fixed rate Floating rate
2010 2009
EURm EURm EURm EURm
Assets .................................... 8795 3588 5 712 3 241
Liabilities .................................. (4 156) (992) (3 771) (1 403)
Assets and liabilities before derivatives .......... 4 639 2 596 1 941 1 838
Interest rate derivatives ...................... 1 036 (994) 1 628 (1 693)
Assets and liabilities after derivatives ........... 5 675 1 602 3 569 145
Equity price risk
Nokia is exposed to equity price risk as the result of market price fluctuations in the listed equity
instruments held mainly for strategic business reasons.
Nokia has certain strategic noncontrolling investments in publicly listed equity shares. The fair value
of the equity investments which are subject to equity price risk at December 31, 2010 was
EUR 8 million (EUR 8 million in 2009). In addition, Nokia invests in private equity through venture
funds, which, from time to time, may have holdings in equity instruments which are listed in stock
exchanges. These investments are classified as availableforsale carried at fair value. See Note 16 for
more details on availableforsale investments.
Due to the insignificant amount of exposure to equity price risk, there are currently no outstanding
derivative financial instruments designated as hedges for these equity investments.
Nokia is exposed to equity price risk on social security costs relating to its equity compensation plans.
Nokia mitigates this risk by entering into cash settled equity option contracts.
ValueatRisk
Nokia uses the ValueatRisk (VaR) methodology to assess the Group exposures to foreign exchange
(FX), interest rate, and equity risks. The VaR gives estimates of potential fair value losses in market
risk sensitive instruments as a result of adverse changes in specified market factors, at a specified
confidence level over a defined holding period.
In Nokia the FX VaR is calculated with the Monte Carlo method, which simulates random values for
exchange rates in which the Group has exposures and takes the nonlinear price function of certain FX
derivative instruments into account. The variancecovariance methodology is used to assess and
measure the interest rate risk and equity price risk.
The VaR is determined by using volatilities and correlations of rates and prices estimated from a one
year sample of historical market data, at 95% confidence level, using a onemonth holding period. To
put more weight on recent market conditions, an exponentially weighted moving average is
performed on the data with an appropriate decay factor.
This model implies that within a onemonth period, the potential loss will not exceed the VaR
estimate in 95% of possible outcomes. In the remaining 5% of possible outcomes, the potential loss
will be at minimum equal to the VaR figure, and on average substantially higher.
The VaR methodology relies on a number of assumptions, such as, a) risks are measured under
average market conditions, assuming that market risk factors follow normal distributions; b) future
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Notes to the Consolidated Financial Statements (Continued)