Market risk

Currency risk

Currency risk is the risk that fair value or future cash flows will fluctuate due to changes in foreign exchange rates. Exposure to currency risk arises mainly from payment flows in foreign currency – which is known as transaction exposure – and from the translation of foreign subsidiaries’ income statements and balance sheets into SEK, the Group’s reporting currency – known as translation exposure.

Transaction exposure

Transaction exposure is the risk that earnings will be negatively impacted by fluctuations in exchange rates for cash flows that take place in foreign currency. The Group’s outflows are mainly in SEK, EUR and USD, and at the same time the Group’s inflows are mainly in EUR, USD and MXN. The Group is therefore considerably affected by changes in these exchange rates as regards operational transaction exposure. Where financial transaction exposure is concerned, this is largely limited to intragroup exposure.

The company’s policy allows forecast cash flows to be hedged on an ongoing basis. Under the financial policy, transaction exposure may be reduced through the use of derivative instruments.

Currency hedging accounting was introduced 1 April 2017. Most of Edgeware’s accounts are invoiced in USD, EUR or MXN. Edgeware has historically had a balance between inflows and outflows of USD, thus representing a natural hedge. The flow of USD will be monitored if a need for hedging arises in the future. For

EUR and MXN, exposure is considerable between EUR/SEK and MXN/SEK, which means hedges have to be taken up to manage currency exposure. Hedging is planned to occur via forward contracts and swaps. This applies to orders with a value exceeding SEK 2,000,000 and an expected payment term exceeding 60 days from receipt of an order, which corresponds to about 80–90% of the company’s net exposure.

As of the closing day, 0% of the cash flows in EUR, USD and MXN was hedged.

The table below shows the nominal net amounts of the major flows giving rise to transaction exposure. The exposure is stated based on the Group’s payment flows in the most significant currencies and is presented in MSEK.

Currency

31 Dec 2017

31 Dec 2016

EUR

129.3

164.7

USD

19.9

14.0

MXN

7.7

13.3

As of the closing day, the net book value of the Group’s monetary assets and liabilities that are subject to translation into SEK amount to the sums below, presented in MSEK:

Currency

31 Dec 2017

31 Dec 2016

EUR

59.2

67.5

USD

17.8

22.0

MXN

0.1

4.7

Translation exposure

Translation exposure is the risk that the value of the Group’s net investments in foreign currency will be negatively impacted by changes in foreign exchange rates. The Group consolidates the net assets in SEK on the closing day. This risk is known as translation exposure and is not currency-hedged under the Group’s financial policy.

The translation exposure for net investments in foreign currency is stated in local currency.

The Group’s net investments refer to investments in the foreign subsidiary Edgeware Inc. in the US. The net investments correspond to the value of the company’s equity and amounted to a net expense of USD expense 4.2 millon (expense 3.8) as of 31 December 2017.

The table below, “Sensitivity analysis for market risk”, presents the effects of exchange rate fluctuations against SEK for the most significant foreign currencies.