Foreign exchange risk
Foreign exchange risk refers to the adverse effects of changes in foreign exchange rates on Husqvarna's income and equity. In order to manage such effects, the Group covers these risks within the framework of the Financial Policy. The Group's over-all currency exposure is managed centrally.
The major currencies to which Husqvarna is exposed are USD, EUR, CAD, RUB, GBP and SEK against a range of currencies.
Transaction exposure from commercial flows
The Financial Policy stipulates hedging of forecasted sales and purchases in foreign currencies taken into consideration the price fixing periods and the competitive environment. Normally, 75-100% of the invoiced and forecast flows are hedged up to 6 months, while forecast flows for 6-12 months are hedged between 50% and 75%. Group subsidiaries primarily cover their risks in commercial currency flows through Group Treasury. Group Treasury assumes the currency risks and covers such risks externally by utilizing currency derivatives, for which hedge accounting is applied.
The table shows the forecasted transaction flows (imports and exports) for the 12-month period of 2009 and hedges at year-end 2008.
| Commercial flows | ||||
|---|---|---|---|---|
| Currency | 2009 Forecastflow SEKm | 31 Dec 2008 Total hedgeamountSEKm | 2008 Forecastflow SEKm | 31 Dec 2007 Total hedgeamount SEKm |
| EUR | 2,597 | -2,370 | 2,460 | -1,914 |
| CAD | 1,043 | -771 | 1,064 | -677 |
| RUB | 542 | -362 | 307 | -188 |
| PLN | 459 | -345 | 476 | -332 |
| GBP | 410 | -335 | 546 | -339 |
| Other | 1,652 | -628 | 1,193 | -622 |
| USD | -2,174 | 1,802 | -1,867 | 1,358 |
| SEK | -4,529 | 3,009 | -4,178 | 2,715 |
| The effect of hedging on operating income amounted to SEK -89m (-152) during 2008. At year-end 2008, the unrealized ex-change rate result on forward contracts amounted to SEK -23m (-86), all of which will mature in 2009. | ||||
Translation exposure on consolidation of entities outside Sweden
Changes in exchange rates also affect the Group's income on translation of income statements of foreign subsidiaries into SEK. Husqvarna does not hedge such exposures. The translation exposure arising from income statements of foreign subsidi-aries is included in the sensitivity analysis below.
Foreign exchange sensitivity from transaction and translation exposure
Husqvarna is particularly exposed to changes in the exchange rates of SEK and EUR. Furthermore, the Group has significant exposures to USD, CAD, GBP and a number of other currencies. A 10% increase or decrease in the value of USD, EUR and CAD against SEK, disregarding any effects from hedges, would affect the Group's income before financial items and tax by ap-proximately SEK +/- 276m (287) for one year, using a static calculation. This assumes the same distribution of earnings and costs as in 2008 and does not include any dynamic effects, such as changes in competitiveness or consumer behavior arising from such changes in exchange rates. It is also worth noting that, due to the seasonality in Husqvarna's sales, these flows and results are not distributed evenly throughout the calendar year.
Exposure from net investments (balance sheet exposure)
The net assets and liabilities in foreign subsidiaries constitute a net investment in foreign currency, which generates a trans-lation difference in connection with consolidation. In order to limit negative effects on Group equity resulting from transla-tion differences, hedging is conducted based on borrowings and foreign exchange derivative contracts. This means that the decline in value of a net investment, resulting from a rise in the exchange rate of SEK, is offset by the exchange gain on the Parent Company's borrowings and foreign exchange derivative contracts, and vice versa. The Financial Policy stipulates the extent to which the net investments can be hedged and also sets the benchmark for risk measurement. Group Treasury is allowed to deviate from the benchmark under a given risk mandate. The effect of the hedging is included in the analysis of the currency composition of the Group's net debt, as shown on page 57.
Hedge accounting of currency risk
Husqvarna applies hedge accounting for its commercial flows and for the hedging of net investments in foreign currency. The total unrealized result for hedges of commercial flows amounted to SEK -35m as of December 31 2008, of which SEK -42m is reported in the hedge reserve. Assuming an unchanged exchange rate, the effects on profit and loss for 2009 would be SEK 7m for Q1, SEK 11m for Q2 , SEK -49m for Q3 and SEK -11m for Q4 2009. During the year, no ineffectiveness has occurred in relation to the hedging of commercial flows while a minor degree of ineffectiveness has occurred in the hedging of net investments in foreign operations. A total amount of SEK 0.9m (-0.3) has negatively affected profit and loss. See Note 16 for the effect on equity of hedge accounting.