The Volvo Group’s global operations expose the company to financial risks in the form of interest rate risks, currency risks, credit risks, liquidity risks and other price risks. Work on financial risks comprises an integrated element of the Volvo Group’s business. Volvo Group strives 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 managed pursuant to the Volvo Group’s established policies in these areas.
The Volvo Group’s risk management related to specific balance sheet items are also described in other areas of the Annual Report, see references in the Notes.
Interest-rate risk refers to the risk that changed interest-rate levels will affect the Volvo Group´s consolidated earnings and cash flow (cash-flow risks) or the fair value of financial assets and liabilities (price risks).
Matching the interest-fixing terms of financial assets and liabilities reduces the exposure. Interest-rate swaps are used to change/influence the interest-fixing term for the Volvo Group’s financial assets and liabilities. Currency interest-rate swaps enable borrowing in foreign currencies from different markets without introducing currency risk. The Volvo Group also has 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-flow risks The effect of changed interest rate levels on future currency and interest-rate flows primarily pertains to the Volvo Group’s customer financing operations and net financial items. Customer finance operations measure the degree of matching interest rate fixing on borrowing and lending. The calculation of the matching degree excludes equity, which amounted to between 8 and 10% in the customer finance operations. At year-end 2013, the degree of such matching was 99% (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 reasons, the mandate to mismatch the Customer finance portfolio down to a matching ratio of 80%. At year end 2013, matching ratio was 95% (89). Any gains or losses from the mismatch impacts the segment Group functions and other within Industrial operations. At year-end 2013, in addition to the assets in its customer-financing operations, the Volvo Group’s interest-bearing assets consisted primarily of cash, cash equivalents 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 fixed term security. On December 31, 2013, the average interest on Industrial operations financial assets was 1.1% (1.1). After taking derivatives into account, outstanding loans had interest terms corresponding to a short term interest-rate fixing term, between one to three months and the average interest on Industrial operations financial liabilities at year-end amounted to 3.3% (3.2), including the Volvo Group’s credit costs.
Price risks (C) Exposure to price risks as result of changed interest-rate levels refers to financial assets and liabilities with a longer interest-rate fixing term (fixed interest).
The following table (D) shows the effect on earnings before taxes in Industrial Operations net financial position, including pensions and similar obligations, if interest rates were to increase by 1 percentage point, (100 basis points) assuming an average interest-rate fixed term of three months.*
Net financial position
Impact on earnings before tax
Impact on Net financial position
if interest rate rises 1% (Interest-rate risks) (A)
if SEK appreciates against other currencies 10% (Currency risks) (B)
* The sensitivity analysis on interest rate risks is based on simplified assumptions. It is not unreasonable 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 above (Table D).
Read more about Industrial operations net financial position.
The Volvo Group’s net assets in different currencies, SEK bn
Currency risks (B)
The content in the balance sheet may be affected by changes in different exchange rates. Currency risks in the Volvo Group’s operations are related to changes in the value of contracted and expected future payment flows (commercial currency exposure), changes in the value of loans and investments (financial currency exposure) and changes in the value of assets and liabilities in foreign subsidiaries (currency exposure of equity).
The aim of the Volvo Group’s currency risk management is to secure cash flow from firm flows through currency hedges pursuant to the established currency policy, and to minimize the exposure of financial items in Volvo Group’s balance sheet. Below is a presentation on how this work is conducted for commercial and financial currency exposure, and for currency exposure of equity.
Commercial currency exposure Transaction exposure from commercial flows 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 flows 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 fluctuations in currency rates affecting the transaction flows in foreign currency are in many cases not against SEK.
The hedging of the Volvo Group's commercial currency exposure is decided centrally. The Volvo Group's consolidated currency portfolio exposure is the value on forecasted future payment flows in foreign currency. Volvo Group only hedge part of the forecasted portfolio that is considered highly probable to occur (i.e firm flows), 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 flows in foreign currency. The amount of firm flows 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 flow per currency on page 110 shows commercial net flows per currency (transactional flows).
(F) The Volvo Group’s outstanding forward contracts and options contracts for hedging of commercial currency risks
Due date 2014
Due date 2015
Due date 2016
Total local currency
Average contract rate
Market value of outstanding forward contracts, SEK M
1) The outstanding forward contracts in CNY/SEK is the hedging of future cash flow of the acqusition of Dongfeng Commercial Vehicles.
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* The tables (G), (H) and (I) on next page show the impact on sales and operating income for the Volvo Group if key currencies fluctuate against SEK. The sensitivity analysis include the transaction impact from commercial flows and the translation impact during the consolidation of foreign subsidiaries. The fluctuations in currency rates affecting the transaction flows in foreign currency are in many cases not against SEK. For further information 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 individual companies’ financial currency exposure. Volvo Treasury uses various derivatives to facilitate lending and borrowing in different currencies without increasing the company’s risk. The net financial position of the Volvo Group is affected by exchange-rate fluctuations since financial 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 operations net financial 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 overcapitalized. 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 above the Volvo Group's net assets in different currencies (SEK bn) are displayed.
Sensitivity analysis* Currency effect on net sales from inflows in foreign currency and translation effect when consolidating net sales in foreign subsidiares for Industrial operations (G).
Sensitivity analysis* Currency effect on operating income from net flows in foreign currency and translation effect when consolidating operating income in foreign subsidiaries for Industrial operations (H).
The Volvo Group’s currency review When the Volvo Group communicates the currency impact on operating income for Industrial operations, the following factors are included:
(I) Currency impact on operating income, SEK billion, Industrial Operations
Net flows in foreign currency
Realized gains and losses on hedging contracts
Unrealized gains and losses on hedging contracts
Unrealized gains and losses on receivables and liabilities in foreign currency
Translation effect on operating income in foreign subsidiaries
Total currency impact on operating income
Currency impact on Net flows in foreign currency and Translation effect on operating income in foreign subsidiaries are detailed in table (H) in key currencies.
* The sensitivity analysis on currency rate risks is based on simplified assumptions. It is not unreasonable for the value in SEK to appreciates by 10% in relation to other currencies. In reality, currencies usually do not change in the same direction at any given time, so the actual effect of exchange-rate changes may differ from the sensitivity analysis. Please refer to table (
Credit risks are defined as the risk that the Volvo Group does not receive payment for recognized accounts receivable and customer-financing receivables (commercial credit risk), that the Volvo Group’s investments are unable to be realized (financial credit risk) and that potential profit is not realized due to the counterparty not fulfilling its part of the contract when using derivative instruments (financial counterparty risk).
The objective of the Volvo Group Credit Policy is to define and measure the credit exposure and control the risk of losses deriving from credits to customers, credits to suppliers, counter party risks and Customer Dealer Financing activities.
Commercial credit risk The Volvo Group’s credit granting is steered by Group-wide policies and customer-classification rules. The credit portfolio should contain a distribution among different customer categories and industries. The credit risks are managed through active credit monitoring, follow-up routines and, where applicable, product repossession. Moreover, regular monitoring ensures that the necessary allowances are made for incurred losses on doubtful receivables. In Notes 15 and 16, ageing analyses are presented of customer finance receivables overdue and accounts receivables overdue in relation to the reserves made.
The customer-financing receivables in the Volvo Group’s customer-financing operations amounted at December 31, 2013 to approximately net SEK 84 billion (81). The credit risk of this portfolio is distributed over a large number of retail customers and dealers. Collaterals are provided in the form of the financed products. In the credit granting the Volvo Group strives for a balance between risk exposure and expected return.
The Volvo Group's accounts receivables amounted as of December 31, 2013 to approximately net SEK 29 billion (27).
Financial credit risk The Volvo Group’s financial assets are largely managed by Volvo Treasury and invested in the money and capital markets. All investments must meet the requirements of low credit risk and high liquidity. According to the Volvo Group’s credit policy, counterparties for investments and derivative transactions should have a rating better or equivalent to A from one of the well-established credit rating institutions.
Liquid funds and marketable securites amounted as of December 31, 2013 to approximately SEK 30 billion (28).
Financial counterparty risk The use of derivatives involves a counterparty risk, in that a potential gain will not be realized if the counterparty fails to fulfill its part of the contract. To reduce the exposure, the Volvo Group enters into master netting agreements (primarily so called ISDA agreements) with all counterpart eligible for derivative transactions. The netting agreements provide the possibility for assets and liabilities to be set off under certain circumstances, such as in the case of the counterpart's insolvency. These netting agreements have no effect on profit, loss or the position of the Volvo Group, since derivative transactions are accounted for on a gross-basis, with the exception of the derivatives described in footnote 3, under the table on page 161 in note 30. Counterparty risk exposure for derivatives is also limited through weekly cash transfers corresponding to the value change of open contracts. The Volvo Group's gross exposure from positive derivatives, amounting to SEK 3,713 M (5,148) is reduced by 41% (43%) to SEK 2,203 M (2,948) by netting agreements and cash deposits, so called CSA agreements. The Volvo Group is actively working with limits per counterpart in order to reduce risk for high net amounts towards individual counterparts.
Read more about the Volvo Group´s gross exposure from positive derivatives per type of instrument in note 30.
Liquidity risk is defined as the risk that the Volvo Group would be unable to finance or refinance its assets or fulfill its payment obligations.
The Volvo Group assures itself of sound financial preparedness by always having liquid funds and committed facilities to cover the Volvo Group's expected liquidity needs for a period of 12-18 months in a scenario with no access to capital markets.
The adjacent graph (J) discloses expected future cash-flows including derivatives related to financial liabilities. Capital flow refers to expected payments of loans and derivatives, see note 22. Expected interest flow refers to the future interest payments on loans and derivatives based on interest rates expected by the market. The interest flow is recognized within cash flow from operating activities.
In addition to derivatives included in capital flow in the adjacent graph (J) there are also derivatives related to financial liabilities recognized as assets, which are expected to give a future capital flow of SEK 0,5 billion and a future interest flow of SEK 2,4 billion.
The predominant part of expected future cash-flows that expires within 2014 is an effect of the Volvo Group's normal business cycle, with shorter duration in the Customer finance portfolio compared to Industrial operations.
Read more about the maturity structure concerning bond loans and other loans, as well as granted but unutilized credit facilities in Note 22.
Read more about contractual term analyses of the Volvo Group’s future rental payments from non-annullable financial and operational lease contracts in Note 14.
Future cash-flow including derivatives related to non-current and current financial liabilities (J)
Other price risks
Commodity risks refer to the risk that changed commodity prices will affect the consolidated earnings within the Volvo Group. Procurement of commodities such as steel, precious metals and electricity are made on a regular basis where prices are set in the global markets.
Changes in commodity prices are included in the product cost calculation. Increased commodity prices is therefore reflected in the sales price of the Volvo Group´s final products. Purchasing agreements with commodity suppliers may also be long term in nature or structured in a way that short term volatility in commodity prices have less direct effect on Volvo Group's cost base. Financial hedging is performed in order to reduce short term volatility electricity cost in Sweden.