The main financial risks that the Investor group is exposed to are market risks. These are primarily associated with fluctuations in share prices, as well as interest rate risks and foreign exchange rate risks.
Market risks refer to the risk of a change in value of a financial instrument because of changes in share prices, exchange rates or interest rates.
Share price risks
Investor’s most significant risk is share price risk. The majority of Investor’s share price risk exposure is concentrated to Listed Core Investments. It is the long-term commitment that lays the groundwork for Investor’s strategic measures. Investor does not have defined goals for share price risks, as share prices are affected by short term fluctuations. The share price risk for Listed Core Investments is not hedged. The EQT fund investments are also exposed to share price risk.
Exchange rate risks
Currency exposure in investments
Since the majority of Listed Core Investments are listed in SEK, there is a limited direct exchange rate risk that affects Investor’s Balance Sheet. However, Investor is indirectly exposed to exchange rate risks in Listed Core Investments that are listed on foreign stock exchanges or that have foreign currency as their pricing currency. In addition, there are indirectly exchange rate risks since the majority of the companies in the Listed Core Investments business area are active in several markets.
The operating subsidiaries are exposed to exchange rate risks in business and investments made in foreign companies. Also the EQT fund investments are exposed to exchange rate risks.
There is no regular hedging of foreign currency since the investment horizon is more than three years and currency fluctuations are expected to equal out over time. This hedging policy is subject to continuous evaluation and deviations from the policy may be allowed if judged beneficial from a market economic perspective.
Exchange rate risks for investments in the trading operation are minimized through currency derivative contracts at the portfolio level.
Currency exposure in excess liquidity and the debt portfolio
Exchange rate risk in excess liquidity resulting from investments in foreign currency is managed through currency derivative contracts. Exchange rate risk arising in connection with loans in foreign currency is managed by, among other things, exchanging the loans to SEK through currency swap contracts.
Currency exposure in transactions
Investor AB’s guideline is, for future known cash flows in foreign currency exceeding a certain amount, are to be hedged through forward exchange contracts, currency options or currency swaps.
Currency exposure due to net investments in foreign operations
Currency exposure associated with investments made in independent foreign entities is considered as a translation risk and not an economic risk. The exposure arises when the foreign net investment is translated to SEK on the balance sheet date and it is recognized in the translation reserve under equity. Net investments are partly neutralized by loans in foreign currencies.
Interest rate risk
Excess liquidity and debt portfolio
For excess liquidity exposed to interest rate risks, the goal is to limit interest rate risks while maximizing return within the established guidelines of the risk policy. High financial flexibility is also strived for in order to satisfy future liquidity needs.
On the liability side, Investor strives to manage interest rate risks by having an interest rate fixing tenor within the established limits and instructions of the Risk Policy. Fixed rates are established to provide flexibility to change the loan portfolio in step with investment activities and to minimize loan costs and volatility in the cash flow over time.
Investor uses derivatives to hedge against interest rate risks (related to both fair value and cash flow fluctuations) in the debt portfolio.
Credit risk is the risk of a counterparty or issuer being unable to repay a liability 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, currency swaps). In order to limit credit risks, there are specified limits for exposure to single counterparties.
With a view to further limiting credit risks in interest rate and currency swaps, and other derivative transactions, agreements are established with counterparties in accordance with the International Swaps and Derivatives Association, Inc. (ISDA), as well as netting agreements.
Liquidity and financing risks
Liquidity risk refers to the risk that a financial instrument cannot be divested without considerable extra costs, and to the risk that liquidity will not be available to meet payment commitments.
Liquidity risks are reduced in Treasury operations by keeping the maturity of short-term cash investments up to two years and by always maintaining a higher than 1:1 ratio between cash and credit commitments/current liabilities.
Liquid funds are invested in deposit markets and short-term interest-bearing securities with low risk and high liquidity. In other words, they are invested in a well-functioning second-hand market, allowing conversion to liquid funds when needed. Liquidity risk in the trading operations is restricted via limits established by the Board.
Financing risks are defined as the risk that financing can not be obtained, or can only be obtained at increased costs as a result of changed conditions in the capital market. To reduce the effect of refinancing risks, limits are set regarding average maturities for loans.