Volvo 2005 Annual Report Download - page 126

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The Volvo Group
122 Volvo Group 2005
Outstanding forward contracts and option contracts for hedging of commercial currency risks
December 31, 2004 December 31, 2005
Notional Carrying Notional Carrying
amount 1 value Fair value amount 1 value Fair value
Foreign exchange forward contracts
– receivable position 26,203 264 1,775 37,754 536 536
– payable position 9,982 (88) (511) 36,980 (1,272) (1,272)
Options – purchased
– receivable position 2,831 – 112 4,769 51 51
– payable position – – – 3 (3) (3)
Options – written
– receivable position 233 – 0 – – –
– payable position 2,729 – (5) 4,142 (44) (44)
Subtotal 176 1,371 (732) (732)
Commodity forward contracts
– receivable position (10) – 7 394 54 54
– payable position 243 – (32) 71 (11) (11)
Total 176 1,346 (689) (689)
1 The notional amount of the derivative contracts represents the gross contract amount outstanding. To determine the estimated fair value, the major part of the
outstanding contracts have been marked to market. Discounted cash fl ows have been used in some cases.
Notes to consolidated fi nancial statements
Outstanding forward contracts and option contracts as of December 31, 2005 for hedging of commercial currency risks
Other Fair
Currencies currencies value
2
Net fl ow Net fl ow Net fl ow
Million USD GBP EUR Net SEK
Due date 2006 amount 1,783 219 832 6,635
rate
1 7.46 13.44 9.32
Due date 2007 amount 906 – –
rate
1 7.46 – –
Due date 2008 amount 106 – –
and onwards rate
1 7.46 – –
Total 2,795 219 832 6,635
of which, option contracts 488 0 55 862
Fair value of forward and
option contracts, SEK M
2 (498) (28) (77) (129) (732)
1 Average forward contract rate.
2 Outstanding forward contracts valued at market rates.
Net fl ows per currency 2005 Other
Currencies currencies Total
Million USD GBP EUR Net SEK
Net fl ows 2005 amount 2,447 383 1,001
rate
3 7.4791 13.5849 9.2943
Net fl ows SEK M 3 18,300 5,200 9,300 14,400 47,200
Hedged portion, % 4 73 57 83
3 Average exchange rate during the fi nancial year.
4 Outstanding currency contracts, regarding commercial exposure due in 2006, percentage of net fl ows 2005.
interest rate risks is reduced. Interest rate swaps are used to change
the fi xed interest rate periods of the Group’s fi nancial assets and lia-
bilities. Exchange rate swaps make it possible to borrow in foreign
currencies in different markets without incurring currency risks.
Volvo also holds standardized futures and forward rate agreements.
The majority of these contracts are used to secure interest levels for
short-term borrowing or deposits. Carrying amounts, fair values and
additional specifi cations of derivative instruments used to manage
currency and interest rate risks related to fi nancial assets and liabili-
ties are shown in the adjoining table.
Cash-fl ow risks
The exposure for cash-fl ow risks related to changes in interest rates
pertains mainly to the Group’s customer fi nancing operations and
interest net. According to the Group policy, matching of interest rate
terms between lending and funding should exceed 80% in the cus-
tomer fi nancing operations. At the end of 2005, this matching was
99%. Volvo’s interest-bearing assets, apart from the customer
fi nancing portfolio, consisted at the end of 2005 mainly of liquid
funds that were invested in interest bearing securities with short-
term maturities. By use of derivative instruments, the target is to
achieve a fi xed interest period of six months for the Group’s liquid