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 financing.

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. As of the closing day, 31th of December 2016, 0% of the cash flows in EUR, USD and MXN was hedged. Hedge accounting wasl 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 versus SEK and MXN versus 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 60–70% of the company’s net exposure.

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 TSEK.

Currency 31 Dec 2016 31 Dec 2015
EUR 164,685 121,011
USD 13,953 11,143
MXN 13,315 5,089

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 TSEK:

Currency 31 Dec 2016 31 Dec 2015
EUR 67,534 30,506
USD 22 29,243
MXN 4,669 18,237

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 3,827,000 (3,110,000) as of 31 December 2016.

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