The main financial risks the Investor Group is exposed to are market risks, credit risks, liquidity risks and financing risks.
Markets risks
Market risks occur due to fluctuations of prices, interest and currency rates.
Price risks
Most of Investor’s price risk exposure is found in the Core Investments business area, but the other business areas are also exposed to fluctuations in prices.
Currency rate risk
Currency exposure in investments
Since the Core Investments companies are listed in Swedish kronor, Investor’s balance sheet is not directly affected by currency rate risk, although it can be indirectly exposed to such risks in holdings that are listed on foreign stock exchanges or offer prices in foreign currency. Indirect currency rate risks also arise from the international operations of the companies in the Core Investments business area.
Some holdings in the Operating Investments and Private Equity Investments business areas are exposed to currency rate risks due to investments made in foreign companies. Currency rate risks in these business areas are not hedged on a regular basis since the investments have a long-term horizon and currency fluctuations are expected to even out over time. This hedging policy is subject to continuous evaluation and deviations from the policy may be allowed if it is judged to be beneficial from a market-economic perspective.
Currency rate risks related to investments in the Active Portfolio Management are mitigated through currency swap contracts at the portfolio level.
Currency exposure in excess liquidity and the debt portfolio
Currency rate risk in excess liquidity resulting from investments in foreign currency is managed through currency swap contracts. Currency rate risks related to loans in foreign currencies are managed by exchanging the loans to SEK by means of currency swaps. The objective is to mitigate the currency rate risk in excess liquidity and the debt portfolio.
Currency exposure in transactions
Investor’s general guideline is that future cash flows in foreign currencies known to exceed a certain amount have to be hedged using currency forward contracts or currency options.
Interest rate risk
Excess liquidity and debt portfolio
The goal for excess liquidity exposed to interest rate risks is to maximize the return within the established guidelines of the Risk Policy while limiting interest rate risks. High financial flexibility is also an objective in order to satisfy future liquidity needs. Hence, investments in interest-bearing securities have a short duration.
On the liability side, Investor strives to manage interest rate risks by fixing the interest rate for a period of time to create the flexibility to change the loan portfolio in step with investment activities and minimize loan costs and the volatility of the cash flow over time. Investor uses derivatives to hedge interest rate risks in the debt portfolio.
Liquidity and financing risk
Liquidity risk refers to the risk that a financial instrument cannot be divested without considerable extra costs, and that liquidity will not be available to meet payment commitments.
Liquidity risks are minimized in Treasury operations by keeping the maturities of cash investments short and always ensuring that the ratio between cash and credit commitments/current liabilities is greater than one. Liquid funds are invested in the short-term deposits market and short-term interest-bearing securities with low risk and high liquidity, allowing a conversion to cash when needed.
Financing risks are defined as the risk that financing cannot be obtained, or can only be obtained at increased costs, as a result of changed conditions in the capital market. In order to mitigate financing risks, the Treasury function works actively to ensure financial preparedness by establishing loan and credit facilities for long-term and short-term borrowing.
Financing risks are further reduced by allocating loan maturities evenly over time and by diversifying sources of capital. An important aspect in this context is the ambition to have a long borrowing profile.
Credit risk
Credit risks occur when a counterparty or issuer is not able to honor its commitments to Investor. Investor is exposed to credit risks primarily through investments of excess liquidity in interest-bearing securities. Credit risks also arise as a result of positive market values in derivative instruments, mainly interest rate and currency swaps. One of the ways credit risks are managed is by implementing an extensive limit structure. According to Investor’s credit risk policy, Investor may only be exposed to credit risks towards counterparties with high creditworthiness according to the valuations of recognized rating institutes. With a view to further limiting credit risks in interest rate and currency swaps and other derivative transactions, agreements are required in accordance with the International Swaps and Derivatives Association, Inc. (ISDA).
Information updated 2009-11-25 07:39:41