Nokia 2006 Annual Report Download - page 193
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Notes to the Consolidated Financial Statements (Continued)
37. Risk management (Continued)
management and determines the allocation of responsibilities for financial risk management in
Nokia. Operating Policies cover specific areas such as foreign exchange risk, interest rate risk, use of
derivative financial instruments, as well as liquidity and credit risk. Nokia is risk averse in its
Treasury activities. Business Groups have detailed Standard Operating Procedures supplementing the
Treasury Policy in financial risk management related issues.
a) Market risk
Foreign exchange risk
Nokia operates globally and is thus exposed to foreign exchange risk arising from various currency
combinations. Foreign currency denominated assets and liabilities together with expected cash flows
from highly probable purchases and sales give rise to foreign exchange exposures. These transaction
exposures are managed against various local currencies because of Nokia’s substantial production
and sales outside the Eurozone.
Due to the changes in the business environment, currency combinations may also change within the
financial year. The most significant noneuro sales currencies during the year were US dollar (USD),
UK pound sterling (GBP) and Chinese yuan (CNY). In general, depreciation of another currency relative
to the euro has an adverse effect on Nokia’s sales and operating profit, while appreciation of
another currency has a positive effect, with the exception of Japanese yen (JPY), being the only
significant foreign currency in which Nokia has more purchases than sales.
The following chart shows the breakdown by currency of the underlying net foreign exchange
transaction exposure as of December 31, 2006 (in some of the currencies, especially the US dollar,
Nokia has both substantial sales as well as cost, which have been netted in the chart).
Net exposures
GBP
6%
USD
36%
Others
16%
INR
5%
CNY
13% JPY
24%
USD
JPY
CNY
GBP
INR
Others
According to the foreign exchange policy guidelines of the Group, material transaction foreign
exchange exposures are hedged. Exposures are mainly hedged with derivative financial instruments
such as forward foreign exchange contracts and foreign exchange options. The majority of financial
instruments hedging foreign exchange risk have a duration of less than a year. The Group does not
hedge forecasted foreign currency cash flows beyond two years.
F58