Saab 2011 Annual Report Download - page 125

Foreign currency risk
e Group hedges the entire order backlog with the help of currency deriva-
tives. As a result, changes in exchange rates do not aect the Group’s future
results with respect to the current order backlog. Future order bookings are
exposed to uctuations in exchange rates in terms of competitive strength.
is is managed partly by Group Treasury, which hedges the economic expo-
sure in xed price tenders.
Denitions
Foreign currency risk refers to the risk that uctuations in exchange rates will
negatively aect income. Exchange rate uctuations aect Saab’s income and
equity in various ways:
t Income is aected when sales revenue and the cost of goods and services
sold are in currencies other than the functional currency (economic and
transaction exposure)
t Income is aected when the income of foreign Group companies is
translated to  (translation exposure)
t Income or equity is aected when the assets and liabilities of foreign
Group companies are translated to  (translation exposure)
t Income can be aected by impairment tests of non-hedged future cash
ows in foreign currency in unprotable contracts (impairment testing)
Saab distinguishes between the above-mentioned types of exposure. Policy
descriptions are provided under each exposure.
Framework agreements, which contain both transaction and economic
exposures, are in place mainly for various civil aeronautics programmes.
Economic exposure
Fixed-price tenders in foreign currency entail a foreign currency risk that
consitutes an economic exposure. e risk is limited primarily through con-
tract formulations (foreign currency clauses) or by bidding in the same cur-
rency as the Group unit’s expenses.
In cases where xed-price tenders are issued in foreign currency, the net
exposure is hedged with nancial instruments. e foreign currency risk that
arises for tenders are managed by Saab Treasury within the framework of the
Tender to Contract portfolio. e purpose of the portfolio is to minimise the
Group’s foreign currency risk during the tender period and reduce hedging
costs. e following table shows outstanding nominal net hedges by currency
as of year-end.
Forward contracts1) Options2) Total hedge
Net hedges
(million) 2011 2010 2011 2010 2011 2010
USD 6 -79 -177 -63 -171 -142
EUR -31 -43 -88 -49 -119 -92
GBP -6 -20 -11 -29 -17 -49
CAD - - -37 - -37 -
CZK 35 - - - 35 -
THB -1,382 -1,060 - -500 -1,382 -1,560
1) Also contains sold call and put options.
2) Refers to the net of purchased call and put options.
e tender insurance portfolio is governed by a risk measure based on a
probability-weighted VaR measure consisting of two parts. One part is the
VaR measure for the internal hedges multiplied by the estimated probability
of receiving the tenders. e other part relates to VaR for external hedges. A
risk-neutral situation is dened as one where the sum of the probability-
weighted internal VaR measure and the external VaR measure amounts to
nil, which means that the probability-weighted amount is hedged externally.
e VaR for tender hedges amounted to   () at year-end. Hedge
accounting is not applied to the portfolio’s hedges, due to which the Group’s
results are aected by the outcome of the tenders and the exchange rate for
the underlying currency pair. e portfolio’s eect on the Group’s result in
 was  - ().
Transaction exposure
Future cash ows in foreign currency from the order backlog and framework
agreements are hedged to safeguard gross margins. In , countries outside
Sweden accounted for  per cent () of Saab’s sales. Since a large part of
production takes place in Sweden with expenses denominated in , Saab
has large net ows in foreign currency.
e order backlog contains contracted ows and therefore constitutes a
transaction exposure. e predominant contract currencies in the order
backlog of  . billion (.) are , ,  and . Of the total order
backlog,  per cent () is in xed prices with or without indexing, while the
remaining  per cent () contains variable prices with index and/or cur-
rency clauses.
Netting is applied at the Group level to minimise the transaction expo-
sure in foreign currencies, i.e., incoming currency is utilised to pay for pur-
chases in the same currency. Currency clauses or transactions in the cur-
rency market with forward exchange contracts as hedging instruments are
used as well. Hedges are normally arranged for each specic contract. e
average forward rate is then used as the contract’s rate of revenue recogni-
tion.
An analysis has been made of the currency sensitivity of the market
value of outstanding external hedges for the order backlog and framework
agreements. e eect of a change in exchange rates in the net result of cash
ow hedges (pre-tax) where the  depreciates (making foreign currency
more expensive) or appreciates is shown in the following table.
Market value
31-12-2011
SEK depreciation
of 10%
SEK appreciation
of 10%
Market value in MSEK -45 -880 790
Change -835 835
e currency sensitivity in the order backlog is shown in the table below, i.e.,
the eects of a changes in exchange rates when the krona depreciates or
appreciates in value. In the table, the order backlog for foreign subsidiaries
has been restated to .
Order backlog
31-12-2011
SEK depreciation
of 10%
SEK appreciation
of 10%
Order backlog,
MSEK 37,172 37,508 36,837
Change 336 -336
Hedge accounting according to   is applied to derivatives intended to
hedge the transaction exposure. e ineciency in the cash ow hedges that
aected net income for the year amount to   ().
NOTE 41, CONT.
FINANCIAL INFORMATION > NOTES
SAAB ANNUAL REPORT 2011 121