Volvo 2013 Annual Report Download - page 126

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The Volvo Group’s global operations expose the company to fi nancial risks
in the form of interest rate risks, currency risks, credit risks, liquidity risks
and other price risks. Work on fi nancial risks comprises an integrated
element of the Volvo Group’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 man-
aged pursuant to the Volvo Group’s established policies in these areas.
The Volvo Group’s risk management related to specifi c balance sheet
items are also described in other areas of the Annual Report, see references
in the Notes.
Read more about accounting principles for fi nancial instruments in Note 30,
Financial Instruments.
INTEREST-RATE RISKS A
Interest-rate risk refers to the risk that changed interest-rate levels will
affect the Volvo Group’s consolidated earnings and cash fl ow (cash-fl ow
risks) or the fair value of fi nancial assets and liabilities (price risks).
POLICY
Matching the interest-fi xing terms of fi nancial assets and liabilities
reduces the exposure. Interest-rate swaps are used to change/infl uence
the interest-fi xing term for the Volvo Group’s fi nancial assets and liabili-
ties. Currency interest-rate swaps enable borrowing in foreign currencies
from different markets without introducing currency risk. The Volvo Group
also has standardized 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-fl ow risks
The effect of changed interest rate levels on future currency and inter-
est-rate fl ows primarily pertains to the Volvo Group’s customer fi nancing
operations and net fi nancial items. Customer fi nance operations measure
the degree of matching interest rate fi xing on borrowing and lending. The
calculation of the matching degree excludes equity, which amounted to
between 8 and 10% in the customer fi nance operations. At year-end
2013, the degree of such matching was 99% (99) for the segment Cus-
tomer Finance, which was in line with the Volvo Group’s policy. The central-
ized Treasury function has, for practical as well as business reasons, the
mandate to mismatch the Customer fi nance portfolio down to a matching
ratio of 80%. At year end 2013, matching ratio was 95% (89). Any gains
or losses from the mismatch impacts the segment Group functions and
other within Industrial operations. At year-end 2013, in addition to the
assets in its customer-fi nancing operations, the Volvo Group’s interest-
bearing assets consisted primarily of cash, cash equivalents and liquid
assets invested in short-term interest-bearing securities. The objective for
the Volvo Group’s short-term interest-bearing securities is to achieve a
return on these assets equivalent to a three-month fi xed term security. On
December 31, 2013, the average interest on Industrial operations fi nan-
cial assets was 1.1% (1.1). After taking derivatives into account, outstand-
ing loans had interest terms corresponding to a short term interest-rate
fi xing term, between one to three months and the average interest on
Industrial operations fi nancial liabilities at year-end amounted to 3.3%
(3.2), including the Volvo Group’s credit costs.
Price risks C
Exposure to price risks as result of changed interest-rate levels refers to
fi nancial assets and liabilities with a longer interest-rate fi xing term (fi xed
interest).
The following table D shows the effect on earnings before taxes in
Industrial Operations net fi nancial position, including pensions and similar
obligations, if interest rates were to increase by 1 percentage point, (100
basis points) assuming an average interest-rate fi xed term of three months.*
* The sensitivity analysis on interest rate risks is based on simplifi ed assumptions.
It is not unreasonable for market interest rates to change by one percentage
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
Read more about the Industrial Operations net fi nancial position on page 112.
INTEREST-RATE RISKS CURRENCY RISKS CREDIT RISKS
FINANCIAL RISKS
OTHER PRICE RISKSLIQUIDITY RISKS
NOTE 4 GOALS AND POLICIES IN FINANCIAL RISK MANAGEMENT
CASH-FLOW RISKS
PRICE RISKS FINANCIAL CURRENCY
EXPOSURE
CURRENCY EXPOSURE
OF EQUITY
COMMERCIAL CURRENCY
EXPOSURE COMMERCIAL CREDIT RISK COMMODITY RISK
FINANCIAL CREDIT RISK
FINANCIAL
COUNTERPARTY RISK
INTEREST-RATE RISKS CURRENCY RISKS CREDIT RISKS
FINANCIAL RISKS
OTHER PRICE RISKSLIQUIDITY RISKS
122
FINANCIAL INFORMATION 2013
122