Nokia 2007 Annual Report Download - page 210

35. Risk Management (Continued)
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.
The objective of interest rate risk management is to support Nokia in maximizing its shareholder
value by optimizing the balance between minimizing uncertainty caused by fluctuations in interest
rates and maximizing the consolidated net interest income and expense within risk limits.
The interest rate exposure of the Group is monitored and managed centrally. Due to the current
balance sheet structure of Nokia, primary emphasis is placed on managing the interest rate risk of
investments. Nokia uses the ValueatRisk (“VaR”) methodology to assess and measure the interest
rate risk in the investment portfolio and related derivatives in managing material exposure from the
investment portfolio.
At the reporting date, the interest rate profile of the Group’s interestbearing availableforsale
investment is presented in the table below:
2007 2006
EURm EURm
Fixed rate instruments in availableforsale investment ......................... 7716 5853
Floating rate instruments in availableforsale investment ....................... 1912 1205
9 628 7 058
Equity price risk
Nokia is exposed to market price risk as the result of market price movement in the quoted equity
instruments held mainly for strategic business reasons.
Nokia has certain strategic minority investments in publicly quoted equity shares. The fair value of
the equity investments which are subject to market price risk at December 31 2007 was EUR 10 million
(EUR 8 million in 2006). In addition, Nokia invests in private equity through Nokia Venture Funds,
which, from time to time, could have holdings in equity instruments which are listed in stock
exchanges. These investments are classified as availableforsale carried at fair value. See Note 15 for
more details on availableforsale investments.
Due to the insignificant amount of exposure to equity price risk, there are currently no outstanding
derivative financial instruments designated as hedges of these equity investments.
Nokia is exposed to equity price risk on social security costs relating to stock compensation plans.
Nokia hedges this risk by entering into cash settled equity swap and option contracts.
ValueatRisk
Nokia uses the ValueatRisk (”VaR”) methodology to assess the Group exposures to foreign exchange
(“FX”), interest rate, and equity risks. VaR is a statistical risk measurement of a potential fair value
loss in market risk sensitive instruments, as the result of adverse changes in specified market factors,
at a specified probability level, over a defined holding period.
In Nokia FX VaR is calculated by Monte Carlo simulation with a sufficient amount of random market
rate scenarios to take the nonlinear price function of certain FX derivative instruments into account.
The variancecovariance methodology is used to assess and measure the interest rate risk and equity
price risk.
F67
Notes to the Consolidated Financial Statements (Continued)