Saab 2013 Annual Report Download - page 113

NOTE 41, CONT.
Foreign currency risk
e Group hedges the entire order backlog with the help of currency deriva-
tives. As a result, changes in exchange rates do not aect the Group’s future
results with respect to the current order backlog. Future order bookings are
exposed to uctuations in exchange rates in terms of competitive strength.
is is managed partly by Group Treasury, which hedges the economic expo-
sure in xed price tenders.
Denitions
Foreign currency risk refers to the risk that uctuations in exchange rates will
negatively aect income. Exchange rate uctuations aect Saab’s income and
equity in various ways:
 Income is aected when sales and the cost of goods and services sold
are in currencies other than the functional currency (economic and
transaction exposure)
 Income is aected when the income of foreign Group companies is
translated to  (translation exposure)
 Income or equity is aected when the assets and liabilities of foreign
Group companies are translated to  (translation exposure)
 Income can be aected by impairment tests of non-hedged future
cash ows in foreign currency in unprotable contracts (impairment
testing)
Saab separates the above-mentioned types of exposure in risk management.
Policy descriptions are provided under each exposure.
Framework agreements, which contain both transaction and economic
exposures, are in place mainly for the various civil aeronautics programmes.
Economic exposure
Fixed-price tenders in foreign currency entail a foreign currency risk that
constitutes an economic exposure. is risk is limited primarily through
contract formulations (foreign currency clauses) or by bidding in the same
currency as the Group unit’s expenses.
In cases where xed-price tenders are issued in foreign currency, the net
exposure is usually hedged with nancial instruments. e foreign currency
risk that arises for tenders is managed by Saab Treasury within the frame-
work of the Tender to Contract portfolio. e purpose of the portfolio is to
minimise the Group’s foreign currency risk during the tender period and
reduce hedging costs. e following table shows outstanding nominal net
hedges by currency as of year-end.
Forward contracts1) Options2) Total hedge
Net hedges
(million) 2013 2012 2013 2012 2013 2012
USD -119 -189 -138 -162 -257 -351
EUR -40 -31 -68 -43 -108 -74
GBP -6 -16 -4 -3 -10 -19
AUD - - - 4 - 4
CZK - - 50 - 50 -
1) Also contains sold call and put options.
2) Refers to the net of purchased call and put options.
e tender insurance portfolio is governed by a risk measure based on a
probability-weighted VaR measure consisting of two parts. One part is the
cumulative VaR measure of the external hedge for each tender hedge. e
other part is the cumulative VaR measure of the benchmark hedge for each
tender hedge. e benchmark hedge is the hedge to be used externally based
on Group Treasury policy. If the external hedges for the portfolio’s tender
hedges correspond with the portfolio’s pre-dened benchmark hedges, the
tender insurance portfolio will by denition be risk-neutral – i.e., its VaR
measure will be zero.
e VaR for tender hedge portfolio amounted to   () at year-end.
Hedge accounting is not applied to the portfolio’s hedges, due to which the
Group’s results are aected by the outcome of the tenders and the exchange
rate for the underlying currency pair. e portfolio’s eect on the Group’s
result in  was  - ().
Transaction exposure
Future cash ows in foreign currency from the order backlog and framework
agreements are hedged to safeguard gross margins. In , countries outside
Sweden accounted for  per cent () of Saab’s sales. Since a large part of
production takes place in Sweden with expenses denominated in , Saab
has large net ows in foreign currency.
e order backlog contains contracted ows and therefore constitutes
a transaction exposure. e predominant contract currencies in the order
backlog of  . billion (.) are , ,  and . Of the total
order backlog,  per cent () is in xed prices with or without indexing,
while the remaining  per cent () contains variable prices with index
and/or currency clauses.
Netting is applied at the Group level to minimise the transaction exposure
in foreign currencies, which means incoming currency is utilised to pay
for purchases in the same currency. Currency clauses or transactions in the
currency market with forward exchange contracts as hedging instruments
are used as well. Hedges are normally arranged for each specic contract. e
average forward rate is then used as the contract’s rate of revenue recognition.
e currency sensitivity of the market value of outstanding external
hedges for the order backlog and framework agreements; i.e., the eect of a
change in exchange rates in the net result of cash ow hedges in equity (pre-
tax) where the  depreciates (making foreign currency more expensive)
or appreciates, is shown in the following table.
Market value
31-12-2013
SEK depreciation
of 10%
SEK appreciation
of 10%
Market value in MSEK 82 -856 1,020
Change -938 938
e currency sensitivity in the order backlog; i.e., the eects of a change in
exchange rates when the  depriciates or appreciates in value, is shown in
the table below. In the table, the order backlog for foreign subsidiaries has
been restated in .
Order backlog
31-12-2013
SEK depreciation
of 10%
SEK appreciation
of 10%
Order backlog, MSEK 59,870 60,351 59,389
Change 481 -481
Hedge accounting according to   is applied to derivatives intended to
hedge the transaction exposure. e ineciency in the cash ow hedges that
aected net income for the year amount to   ().
FINANCIAL INFORMATION > NOTES
SAAB ANNUAL REPORT 2013 109