Foreign exchange risk
Valmet operates globally and is exposed to foreign exchange risk in several currencies, although the geographical diversity of operations decrease the significance of any individual currency. Substantial proportion of Valmet’s net sales and costs are generated in euros (EUR), US dollars (USD), Swedish crowns (SEK) and Chinese yuans (CNY).
Foreign exchange transaction exposure arises when a subsidiary has commercial or financial transactions and payments in another currency than its own functional currency and when related cash inflow and outflow amounts are not equal or concurrent.
In accordance with the Treasury Policy, subsidiaries are required to hedge in full the foreign currency exposures on consolidated statement of financial position and other firm commitments. Cash flows denominated in a currency other than the functional currency of the subsidiary are hedged with internal forward exchange contracts with the Treasury for periods, which do not usually exceed two years. Subsidiaries also carry out hedging directly with the banks in countries, where the regulation does not allow corporate internal cross-border contracts.
The Treasury monitors the net position of each currency and decides to what extent a currency position is to be closed. The Treasury is responsible for entering into an external forward transaction corresponding to the internal forward whenever a subsidiary applies hedge accounting. Valmet’s Treasury Policy defines upper limits on the open currency exposures managed by the Treasury; limits have been calculated on the basis of their potential profit and loss impact. To manage the foreign currency exposure, the Treasury may use forward exchange contracts and foreign exchange options.
Valmet is exposed to foreign currency risk arising from both on- and off-balance sheet items. The foreign currency exposure is composed of all assets and liabilities denominated in foreign currencies and their counter values in local currencies. Calculation includes short- and long-term sales and purchase contracts, projected cash flows for unrecognized firm commitments and financial items, net of respective hedges. The table below illustrates the Group’s outstanding foreign currency risk at the end of the reporting period:
This Group level currency exposure is the basis for the sensitivity analysis of foreign exchange risk. Assuming euro to appreciate or depreciate 10 percent against all other currencies, the impact on cash flows, net of taxes, would be:
The sensitivity analysis as required by IFRS 7, includes financial instruments, such as ‘Trade and other receivables’, ‘Trade and other payables’, interest bearing liabilities, deposits, ´Cash and cash equivalents´ and derivative financial instruments.
The table below presents the effects, net of taxes, of a +/- 10 percent change in EUR against all other currencies:
The effect in ‘Equity’ is the fair value change in derivative contracts qualifying as cash flow hedges for firm sales and purchase contracts. The effect in profit and loss is the fair value change for all other financial instruments exposed to foreign exchange risk. With respect to sales and purchase contracts, this includes derivatives, which qualify as cash flow hedges, to the extent the underlying sales transaction, recognized under the percentage of completion method, has been recognized as revenue.
The nominal and fair values of the outstanding foreign exchange derivative contracts are presented in Financial Statements 2016 Note 8.
Translation or equity exposure
Foreign exchange translation exposure arises when the ‘Equity’, ‘Goodwill’ and fair value step up of a subsidiary is denominated in currency other than the functional currency of the parent company. The total non-EUR denominated ‘Equity’, ‘Goodwill’ and fair value step up of the subsidiaries were EUR 413 million (EUR 482 million). The major translation exposures were EUR 160 million (EUR 202 million) in SEK and EUR 116 million (EUR 144 million) in CNY. Valmet is currently not hedging any equity exposure.