Volvo 2014 Annual Report Download - page 128

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USD
7.9
BRL
7.9
The Volvo Group’s global operations expose the Group 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. The Volvo Group strive 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.
Read more about accounting principles for fi nancial instruments in Note 30,
Financial Instruments.
Read more about management of capital on page 25 and page 86.
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
has also 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 Finance
Operations and net fi nancial items. Customer Finance Operations meas-
ure 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 9% in the Customer Finance Operations. At year-end
2014, the degree of such matching was 101% (99) for the segment
Customer Finance, which was in line with the Volvo Group’s policy. The
centralized Treasury function has, for practical as well as business rea-
sons, the mandate to mismatch the Customer Finance portfolio down to a
matching ratio of 80%. At year-end 2014, the matching ratio was 110%
(95). Any gains or losses from the mismatch impact the segment Group
functions and other within Industrial Operations. At year-end 2014, in
addition to the assets in its Customer Finance Operations, the Volvo
Group’s interest-bearing assets consisted primarily of cash, cash equiva-
lents 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, 2014, the average interest on Industrial
Operations fi nancial assets was 0.9% (1.1). After taking derivatives into
account, outstanding loans had interest terms corresponding to a short
term interest-rate fi xing term, between one to three months. The average
interest on Industrial Operations fi nancial liabilities at year-end amounted
to 3.8% (3.3), 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 4:1 shows the effect on earnings before taxes in
Industrial Operations net fi nancial position, excluding 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 impact on equity is earnings after tax.
* The sensitivity analysis on interest rate risks is based on simplifi ed assumptions. It is
not improbable 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 in table 4:1.
Read more about the Industrial Operations net fi nancial position on pages
114 –115 .
Read more in Note 20 Provisions for post-employment benefi ts regarding
sensitivity analysis on the defi ned benefi t obligations when changes in the applied
assumptions for discount rate and infl ations are made.
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
FINANCIAL INFORMATION 2014
124