Volvo 2007 Annual Report Download - page 53
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Please find page 53 of the 2007 Volvo annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Volvo Group is engaged in active dialogues
covering future regulation with relevant author-
ities and industry organizations.
Financial risk
In its operations, the Volvo Group is exposed to
various types of financial risks. Group-wide
policies, which are updated and decided upon
annually, form the basis of each Group company’s
management of these risks. The objectives
of the Group’s policies for management of
financial risks are to optimize the Group’s
capital costs by utilizing economies of scale, to
minimize negative effects on income as a
result of changes in currency or interest rates,
to optimize risk exposure and to clarify areas
of responsibility within the Group’s finance and
treasury activities. Monitoring and control that
established policies are adhered to is continu-
ously conducted. Most of the Volvo Group’s
financial transactions are carried out through
Volvo’s in-house bank, Volvo Treasury, which
conducts its operations within established risk
mandates and limits. Credit risks are mainly
managed by the different business areas.
The nature of the various fi nancial risks and
objectives and policies for the management of
these risks are described in detail in Notes 36
and 37. Volvo’s accounting policies for fi nan-
cial instruments are described in Note 1. Vari-
ous aspects of fi nancial risk are described
separately in the following paragraphs. The
overall impact on a company’s competitive-
ness is also affected however by how various
macro-economic factors interact.
Currency-related risk
More than 90% of the net sales of the Volvo
Group are generated in countries other than
Sweden. Changes in exchange rates have a
direct impact on the Volvo Group’s operating
income, balance sheet and cash flow, as well
as an indirect impact on Volvo’s competitive-
ness, which over time affects the Group’s
earnings. Currency-associated risk in Volvo’s
business operations relates to changes in the
value of contracted and expected future pay-
ment flows (commercial currency exposure),
changes in the value of loans and investments
(financial currency exposure) and changes in
the value of assets and liabilities of foreign
subsidiaries (currency exposure of sharehold-
ers’ equity). In addition, currency movements
can affect Volvo’s pricing of products sold and
materials purchased in foreign currencies as
well as those of its competitors, which may be
affected differently by such movements. Since
Volvo has substantial manufacturing opera-
tions in Sweden and generates a substantial
portion of its revenues in currencies other than
the Swedish krona, Volvo’s earnings in Swed-
ish kronor could be adversely affected short-
term by an appreciation of the Swedish krona
against other currencies.
The objective of the Volvo Group’s currency
risk management is to minimize the short-term
negative effects. The Volvo Group employs
forward contracts and currency options to
hedge the value of future payment flows in for-
eign currencies.
Interest-related risk
Interest-related risk includes risks that
changes in interest rates will impact the
Group’s income and cash fl ow (cash fl ow
risks) or the fair value of fi nancial assets and
liabilities (price risks). Interest-rate risk can be
minimized through “matching” of the fi xed
interest terms of fi nancial assets and liabilities.
Interest rate swaps are used to adjust the
fi xed interest terms of the Group’s fi nancial
assets and liabilities. Currency interest rate
swaps make it possible to borrow from differ-
ent markets in foreign currencies without
assuming currency-associated risk. Volvo also
holds standardized futures and forward rate
agreements. The majority of these contracts
are used to hedge interest rate levels for
short-term borrowing or investment.
Market risk from investments in shares
or similar instruments
The Volvo Group is indirectly exposed to mar-
ket risks from shares and other similar instru-
ments as a result of managed capital trans-
ferred to independent pension plans being
partly invested in instruments of these types.
Credit-related risk
Volvo’s extension of credit is governed by
Group-wide policies and rules for classifying
customers. Efforts are made to ensure that the
credit portfolio is reasonably diversified among
different customer categories and industries.
Credit-associated risk is managed by actively
monitoring credit, routines for follow up and in
07
6.8
9.3
02
9.7
9.1
03
8.0
9.1
04
7.3
9.1
05
7.5
9.2
06
7.4
9.3
01
10.3
9.2
00
9.2
8.4
99
8.3
8.8
SEK/USD
SEK/EUR
Sweden
Europe
The US
05
3.4
3.4
4.3
06
3.7
3.8
4.8
07
4.2
4.2
4.6
00
5.4
5.3
6.0
01
5.1
4.8
5.0
02
5.3
4.8
4.5
03
4.6
4.1
4.0
04
4.4
4.0
4.2
99
5.0
4.5
5.6
Currencies Interest rates in Sweden, Europe and the US, %
Government bonds, 10 year benchmarks
Board of Directors’ Report 2007 49