Volvo 2011 Annual Report Download - page 90

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GOALS AND POLICIES IN FINANCIAL RISK MANAGEMENT
4
Volvo’s global operations expose the company to financial risks in the form
of interest rate risks, currency risks, credit risks and liquidity risks. Work on
financial risks comprises an integrated element of Volvo’s business. Volvo
Group strives to minimize these risks by optimizing the Group’s capital
costs by utilizing economies of scale, minimize negative effects on income
as a result of changes in currency or interest rates and to optimize risk
exposure. All risks are managed pursuant to Volvo’s established policies
in these areas. For further information on Accounting principles for Financial
Instruments refer to note 30, Financial Instruments.
Volvo’s risk management related to specific balance sheet items are thus
also described in other areas of the Annual Report. Refer to the Note’s
instructions.
NOTE
FINANCIAL RISKS
CASH-FLOW RISKS
PRICE RISKS FINANCIAL CURRENCY
EXPOSURE
CURRENCY EXPOSURE
OF EQUITY
COMMERCIAL CURRENCY
EXPOSURE COMMERCIAL CREDIT RISK
FINANCIAL CREDIT RISK
FINANCIAL
COUNTERPARTY RISK
INTEREST-RATE RISKS A
Interest-rate risk refers to the risk that changed interest-rate levels will
affect consolidated earnings and cash flow (cash-flow risks) or the fair
value of financial assets and liabilities (price risks).
POLICY
Matching the interest-fixing terms of financial assets and liabilities
reduces the exposure. Interest-rate swaps are used to change/influence
the interest-fixing term for the Group’s financial assets and liabilities.
Currency interest-rate swaps enable borrowing in foreign currencies from
different markets without introducing currency risk. Volvo also has standard-
ized interest-rate forward contracts (futures) and FRAs (forward-rate
agreements). Most of these contracts are used to hedge interest-rate levels
for short-term borrowing or investments.
Cash-flow risks
The effect of changed interest rate levels on future currency and interest-
rate flows primarily pertains to the Group’s customer financing operations
and net financial items. Customer finance operations measure the degree
of matching interest rate fixing on borrowing and lending. The calculation
of the matching degree excludes equity, which amounted to between 8
and 10% in the customer finance operations. At year-end 2011, the
degree of such matching was 97% (100), which was in line with the Group’s
policy. At year-end 2011, in addition to the assets in its customer-financing
operations, Volvo’s interest- bearing assets consisted primarily of cash,
cash equivalents and liquid assets invested in short-term interest-bearing
securities. The objective is to achieve an interest-fixing term of three
months for the liquid assets in Volvo’s industrial operations through the
use of derivatives. On December 31, 2011, after taking derivatives into
account, the average interest on these assets was 1.9% (2.0). After taking
derivatives into account, outstanding loans had interest terms corre-
sponding to an interest-rate fixing term of three months and the average
interest at year-end amounted to 4.1% (4.3), including Volvo’s credit costs.
Price risks C
Exposure to price risks as result of changed interest-rate levels refers to
financial assets and liabilities with a longer interest-rate fixing term (fixed
interest).
The following table* D shows the effect on income before taxes in
Industrial Operations financial net position , including pensions and similar
net obligations, if interest rates were to increase by 1 percentage point,
(100 basis points) assuming an average interest-rate fixed term of three
months.
* The Note’s sensitivity analysis on interest rate risks is based on simplified
assumptions. It is not unreasonable for market interest rates to change by 1 per-
centage point (100 basis points) on an annual basis. However, in reality, these
rates often rise or decline at different points in time. The sensitivity analysis also
assumes a parallel deferment of the return curve, and that the interest rates on
assets and liabilities will be equally impacted by changes in market interest rates.
Accordingly, the impact of real interest-rate changes may differ from the analysis
presented above. D
INTEREST-RATE RISKS CURRENCY RISKS CREDIT RISKS LIQUIDITY RISKS
INTEREST-RATE RISKS
USD 7.8
BRL 6.6
NOTES TO FINANCIAL STATEMENTS
FINANCIAL INFORMATION 2011
86