Nokia 2011 Annual Report Download - page 282

Key risks are reported to the Group level management to create assurance on business risks as well
as to enable prioritization of risk management activities at Nokia. In addition to general principles there
are specific risk management policies covering, for example treasury and customer related credit risks.
Financial risks
The objective for Treasury activities in Nokia is 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 foreign currency denominated cash
flows from highly probable or 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. 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 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, forward foreign exchange contracts, foreign exchange options and
foreign currency denominated loans to hedge its equity exposure arising from foreign net investments.
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