Nokia 2006 Annual Report Download - page 125

Table 1 Transaction foreign exchange position ValueAtRisk
VaR 2006 2005
EURm EURm
At December 31 ******************************************************** 21.6 12.4
Average for the year **************************************************** 24.6 10.2
Range for the year****************************************************** 17.134.6 3.329.3
Since Nokia has subsidiaries outside the Eurozone, the eurodenominated value of the shareholders’
equity of Nokia is also exposed to fluctuations in exchange rates. Equity changes caused by
movements in foreign exchange rates are shown as a translation difference in the Group
consolidation. Nokia uses, from time to time, foreign exchange contracts and foreign currency
denominated loans to hedge its equity exposure arising from foreign net investments.
Interest rate risk
The Group is exposed to interest rate risk either through market value fluctuations of balance sheet
items (i.e. price risk) or through changes in interest income or expenses (i.e. reinvestment risk).
Interest rate risk mainly arises through interestbearing liabilities and assets. Estimated future
changes in cash flows and balance sheet structure also expose the Group to interest rate risk.
Treasury is responsible for monitoring and managing the interest rate exposure of the Group. Due to
the current balance sheet structure of Nokia, emphasis is placed on managing the interest rate risk
of investments.
Nokia uses the VaR methodology to assess and measure the interest rate risk in the investment
portfolio, which is benchmarked against a combination of threemonth and onetothreeyear
investment horizon. The VaR figure represents the potential fair value losses for a portfolio resulting
from adverse changes in market factors using a specified time period and confidence level based on
historical data. For interest rate risk VaR, Nokia uses variancecovariance methodology. Volatilities
and correlations are calculated from a oneyear set of daily data. The annualized VaRbased interest
rate risk figures for the investment portfolio calculated from oneweek horizon and 95% confidence
level are shown in Table 2, below.
Table 2 Treasury investment portfolio ValueAtRisk
VaR 2006 2005
EURm EURm
At December 31 ********************************************************** 4.8 6.9
Average for the year ****************************************************** 6.3 10.0
Range for the year ******************************************************** 4.49.3 6.915.3
Equity price risk
Nokia has certain strategic minority investments in publicly traded companies. These investments are
classified as availableforsale. The fair value of the equity investments at December 31, 2006 was
EUR 8 million (EUR 8 million in 2005).
There are currently no outstanding derivative financial instruments designated as hedges of these
equity investments. The VaR figures for equity investments, shown in Table 3, below, have been
calculated using the same principles as for interest rate risk.
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