Nokia 2014 Annual Report Download - page 179

177
Financial statements
NOKIA IN 2014
35. Risk management
General risk management principles
The Group has a systematic and structured approach to risk management across business operations and processes. Key risks and
opportunities are identied against business targets either in business operations or as an integral part of long- and short-term planning. Key
risks and opportunities are analyzed, managed, monitored and identied as part of business performance management with the support of risk
management personnel. The Group’s overall risk management concept is based on managing the key risks that would prevent the Group from
meeting its objectives, rather than solely focusing on eliminating risks. The principles documented in the Nokia Risk Management Policy, which
is approved by the Audit Committee of the Board of Directors, require risk management and its elements to be integrated into key processes.
One of the main principles is that the business or function head is also the risk owner, although all employees are responsible for identifying,
analyzing and managing risks as appropriate to their roles and duties. Risk management covers strategic, operational, nancial and hazard risks.
Key risks and opportunities are reviewed by the Group Leadership Team and the Board of Directors in order to create visibility on business risks
as well as to enable prioritization of risk management activities. In addition to the principles dened in the Nokia Risk Management Policy,
specic risk management implementation is reected in other key policies.
Financial risks
The objective for treasury activities is to guarantee sucient funding at all times and to identify, evaluate and manage nancial risks. Treasury
activities support this aim by mitigating the adverse eects on the protability of the underlying business caused by uctuations in the nancial
markets, and by managing the capital structure of the Group by balancing the levels of liquid assets and nancial borrowings. Treasury activities
are governed by the Nokia Group Treasury Policy approved by the Group President and CEO which provides principles for overall nancial risk
management and determines the allocation of responsibilities for nancial risk management activities. Operating procedures approved by the
Group CFO cover specic areas such as foreign exchange risk, interest rate risk, credit and liquidity risk as well as the use of derivative nancial
instruments in managing these risks. The Group is risk averse in its treasury activities.
Financial risks are divided into market risk covering foreign exchange risk, interest rate risk and equity price risk; credit risk covering
business-related credit risk and nancial credit risk; and liquidity risk.
Market risk
Methodology for assessing market risk exposures: Value-at-Risk
The Group uses the Value-at-Risk (“VaR”) methodology to assess exposures to foreign exchange, interest rate, and equity price risks. The VaR
based methodology provides estimates of potential fair value losses in market risk-sensitive instruments as a result of adverse changes in
specied market factors, at a specied condence level over a dened holding period. The Group calculates the foreign exchange VaR using
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 foreign exchange 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 using volatilities and correlations of rates and prices estimated from a one-year sample of historical market data, at a
95% condence 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 gure and, on average, substantially higher. The VaR methodology relies on a number of assumptions such as that risks are measured
under average market conditions, assuming that market risk factors follow normal distributions; future movements in market risk factors follow
estimated historical movements; and the assessed exposures do not change during the holding period. Thus, it is possible that, for any given
month, the potential losses at 95% condence level are dierent and could be substantially higher than the estimated VaR.
Foreign exchange risk
The Group operates globally and is exposed to transaction and translation foreign exchange risks. Transaction risk arises from foreign currency
denominated assets and liabilities together with foreign currency denominated future cash ows. Transaction exposures are managed in the
context of various functional currencies of foreign Group companies. The Group’s foreign exchange procedures remain the same as in the
previous year. Material transactional foreign exchange exposures are hedged unless hedging would be uneconomical due to market liquidity
and/or hedging cost. Exposures are dened using transaction nominal values. Exposures are mainly hedged with derivative nancial instruments
such as forward foreign exchange contracts and foreign exchange options. The majority of nancial instruments hedging foreign exchange risk
have a duration of less than a year. The Group does not hedge forecast foreign currency cash ows beyond two years.
As the Group has entities where the functional currency is other than the euro, the shareholders’ equity is exposed to uctuations in foreign
exchange rates. Equity changes caused by movements in foreign exchange rates are shown as currency translation dierences in the Group’s
consolidated nancial statements. The Group may, from time to time, use forward foreign exchange contracts, foreign exchange options and
foreign currency denominated loans to hedge its foreign exchange exposure arising from foreign net investments.
The Group has certain entities where the functional currency is the currency of a hyperinationary economy. In 2014, the Group recorded
an expense of EUR 17 million, mainly recognized in nancial income and expenses, as a result of the Group’s hyperinationary accounting
assessment for its entity in Venezuela. The impact was not material in 2013 or 2012. Business operations in hyperinationary economies
carry a risk of future devaluation of monetary assets and liabilities. This risk cannot be hedged.