Volvo 2013 Annual Report Download - page 128

Commercial currency exposure
Transaction exposure from commercial fl ows
Volvo Group conducts manufacturing in 18 countries around the globe
and more than 90% of net sales are generated in countries other than
Sweden. Transaction exposure from commercial fl ows in foreign currency
are generated from internal purchases and sales between manufacturing
units and market companies and external sales and purchases in foreign
currency around the globe. As the predominant part of the operations in
the Volvo Group are situated outside Sweden, the fl uctuations in currency
rates affecting the transaction fl ows in foreign currency are in many cases
not against SEK.
The hedging of the Volvo Group’s commercial currency exposure is de -
cided centrally. The Volvo Group’s consolidated currency portfolio exposure
is the value on forecasted future payment fl ows in foreign currency. Volvo
Group only hedge part of the forecasted portfolio that is considered
highly probable to occur (i.e fi rm fl ows), most of which are realized within
six months. The Volvo Group uses forward contracts and currency options
to hedge the portion of the value of forecasted future payment fl ows in
foreign currency. The amount of fi rm fl ows for all periods fall within the
framework of the Volvo Group’s currency policy.
The table F shows outstanding forward and option contracts for the
hedging of commercial currency risks. The table Operating net fl ow per
currency on page 110 shows commercial net fl ows per currency (transac-
tional fl ows).
Translation exposure from the consolidation of operating income in
foreign subsidiaries
In conjunction with the translation of operating income in foreign subsidiaries,
the Volvo Group’s earnings are impacted if currency rates change. The Volvo
Group does not hedge this risk. For more information on currency hedging of
equity see below.
Sensitivity analysis – currencies*
(next page)
The tables G H and I on next page show the impact on sales and oper-
ating income for the Volvo Group if key currencies fl uctuate against SEK.
The sensitivity analysis include the transaction impact from commercial
fl ows and the translation impact during the consolidation of foreign sub-
sidiaries. The fl uctuations in currency rates affecting the transaction fl ows
in foreign currency are in many cases not against SEK. For further infor-
mation see section commercial currency exposure.
Financial currency exposure
Loans and investments in the Volvo Group’s subsidiaries are performed
mainly in local currencies through Volvo Treasury, which minimizes individ-
ual companies’ fi nancial currency exposure. Volvo Treasury uses various
derivatives to facilitate lending and borrowing in different currencies with-
out increasing the company’s risk. The net fi nancial position of the Volvo
Group is affected by exchange-rate fl uctuations since fi nancial assets and
liabilities are distributed among the Volvo Group companies that conduct
their operations using different currencies.
Table D discloses the impact on earnings before tax of Industrial oper-
ations net fi nancial position, including pensions and similar net obligations,
if SEK were to strengthen by 10%.
Currency exposure of equity
The carrying amount of assets and liabilities in foreign subsidiaries are
affected by current exchange rates in conjunction with the translation of
assets and liabilities to Swedish kronor. To minimize currency exposure of
equity, the size of equity in foreign subsidiaries is continuously optimized
with respect to commercial and legal conditions. Currency hedging of
equity may occur in cases where a foreign subsidiary is considered over-
capitalized. Net assets in foreign subsidiaries, associated companies and
joint ventures amounted at year-end 2013 to SEK 66,0 billion (69,8). The
need to undertake currency hedging relating to investments in associated
companies, joint ventures and other companies is assessed on a case-by-
case basis.
On the map on page 122–123 the Volvo Group’s net assets in different
currencies (SEK bn) are displayed.
Goals and policies in fi nancial risk management (cont.)
124
FINANCIAL INFORMATION 2013
124