Saab 2014 Annual Report Download - page 121

FINANCIAL INFORMATION – NOTES
Foreign currency risk
The Group hedges the entire order backlog with the help of currency derivatives.
As a result, changes in exchange rates do not affect the Group’s future results with
respect to the current order backlog. Future order bookings are exposed to fluctu-
ations in exchange rates in terms of competitive strength. This is managed partly
by Group Treasury, which hedges the economic exposure in fixed price tenders.
Definitions
Foreign currency risk refers to the risk that fluctuations in exchange rates will
negatively affect income. Exchange rate fluctuations affect Saab’s income and
equity in various ways:
• Income is affected when sales and the cost of goods and services sold are in
currencies other than the functional currency (economic and transaction expo-
sure)
• Income is affected when the income of foreign Group companies is translated to
SEK (translation exposure)
• Income or equity is affected when the assets and liabilities of foreign Group
companies are translated to SEK (translation exposure)
• Income can be affected by impairment tests of non-hedged future cash flows in
foreign currency in unprofitable 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. This risk is limited primarily through contract formulations
(foreign currency clauses).
In cases where fixed-price tenders are issued in foreign currency, the net expo-
sure is usually hedged with financial instruments. The foreign currency risk that ari-
ses for tenders is managed by Saab Treasury within the framework of the Tender to
Contract portfolio. The purpose of the portfolio is to minimise the Group’s foreign
currency risk during the tender period and reduce hedging costs. The following
table shows outstanding nominal net hedges by currency as of year-end.
Net hedges
(million)
Forward
contracts1) Options2) Total hedge
2014 2013 2014 2013 2014 2013
USD -242 -119 389 -138 147 -257
EUR -52 -40 -63 -68 -115 -108
GBP -18 -6 -3 -4 -21 -10
HKD -96 - - - -96 -
CZK - - - 50 - 50
1) Also contains sold call and put options.
2) Refers to the net of purchased call and put options.
The tender insurance portfolio is governed by a risk measure based on a probabi-
lity-weighted VaR measure consisting of two parts. One part is the cumulative VaR
measure of the external hedge for each tender hedge. The other part is the cumu-
lative VaR measure of the benchmark hedge for each tender hedge. The bench-
mark 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-defined benchmark hedges, the tender insurance portfolio will by
definition be risk-neutral – i.e., its VaR measure will be zero.
The VaR for tender hedge portfolio amounted to MSEK 7 (15) at year-end.
Hedge accounting is not applied to the portfolio’s hedges, due to which the
Group’s results are affected by the outcome of the tenders and the exchange rate
for the underlying currency pair. The portfolio’s effect on the Group’s result in 2014
was MSEK -5 (-26).
Transaction exposure
Future cash flows in foreign currency from the order backlog and framework agree-
ments are hedged to safeguard gross margins. In 2014, countries outside Sweden
accounted for 55 per cent (59) of Saab’s sales. Since a large part of production
takes place in Sweden with expenses denominated in SEK, Saab has large net
flows in foreign currency.
The order backlog contains contracted flows and therefore constitutes a trans-
action exposure. The predominant contract currencies in the order backlog of
SEK60.1 billion (59.9) are SEK, USD, EUR and GBP. Of the total order backlog,
47per cent (46) is in fixed prices with or without indexing, while the remaining
53per cent (54) 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 specific contract. The average forward rate is then used
as the contract’s rate for revenue recognition.
The currency sensitivity of the market value of outstanding external hedges for
the order backlog and framework agreements; i.e., the effect of a change in
exchange rates in the net result of cash flow hedges in equity (pre-tax) where the
SEK depreciates (making foreign currency more expensive) or appreciates, is
shown in the following table.
Market
value
31-12-2014
SEK
depreciation
of 10%
SEK
appreciation
of 10%
Market value in MSEK -792 -1,332 -252
Change -540 540
The currency sensitivity in the order backlog; i.e. the effect of a change in exchange
rates where the SEK depreciates or appreciates, is shown in the following table. In
the table the order backlog for foreign subsidiaries is translated into MSEK.
Market
value
31-12-2014
SEK
depreciation
of 10%
SEK
appreciation
of 10%
Order backlog, MSEK 60,128 60,639 59,617
Change 511 -511
Hedge accounting according to IAS 39 is applied to derivatives intended to hedge
the transaction exposure. The inefficiency in the cash flow hedges that affected net
income for the year amount to MSEK 0 (2).
In the event the cash flow is far in the future, an extension strategy can be app-
lied, the currency hedge can be shifted to an earlier date than when the cash flow is
expected and hedge accounting for that time period is then applied to changes in
the spot price.
Note 41, cont.
SAAB ANNUAL REPORT 2014 – 117