Nokia 2012 Annual Report Download - page 273

Financial risks
The objective for Treasury activities in Nokia is to guarantee sufficient funding for the Group at all
times, and to identify, evaluate and manage financial risks. Treasury activities support this aim by
mitigating the adverse effects caused by fluctuations in the financial markets on the profitability of the
underlying businesses and by managing the capital structure of the Group by prudently balancing the
levels of liquid assets and financial borrowings.
Treasury activities are governed by the Treasury Policy approved by the CEO, that provides principles
for overall financial risk management and determines the allocation of responsibilities for financial risk
management in Nokia. Standard Operating Procedures approved by the CFO cover specific areas
such as foreign exchange risk, interest rate risk, credit and liquidity risk as well as use of derivative
financial instruments in managing these risks. Nokia is risk averse in its Treasury activities.
Financial risks are divided into (a) market risk (covering foreign exchange risk, interest risk and equity
price risk), (b) credit risk (covering business related credit risk and financial credit risk) and (c) liquidity
risk.
(a) Market Risk
Methodology for assessing market risk exposures: 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
movements in market risk factors follow estimated historical movements; c) the assessed exposures
do not change during the holding period. Thus it is possible that, for any given month, the potential
losses at 95% confidence level are different and could be substantially higher than the estimated VaR.
Foreign exchange risk
Nokia operates globally and is exposed to transactional and translational foreign exchange risks.
Transaction risk arises from foreign currency denominated assets and liabilities together with foreign
currency denominated future cash flows. Transaction exposures are managed in the context of various
functional currencies of foreign Group companies.
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