CURRENCY RISKS B

The balance sheet may be affected by changes in different exchange rates. Currency risks in the Volvo Group’s operations are related to changes in the value of contracted and expected future payment flows (commercial currency exposure), changes in the value of loans and invest- ments (financial currency exposure) and changes in the value of assets and liabilities in foreign subsidiaries (currency exposure of equity).

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POLICY

The aim of the Volvo Group’s currency risk management is to secure cash flow from firm flows through currency hedges pursuant to the established currency policy, and to minimize the exposure of financial items in the Volvo Group’s balance sheet. Below is a presentation on how this work is con- ducted for commercial and financial currency exposure, and for currency exposure of equity.

INTEREST-RATE RISKS CURRENCY RISKS CREDIT RISKS FINANCIAL RISKS

OTHER PRICE RISKS LIQUIDITY RISKS

4:1

Risk net finan- cial position Dec 31, 2015 SEK M Net financial position excl. pensions

 Impact on earnings before tax if interest rate rises 1%

A (Interest-rate risks)

Impact on Net financial position if SEK appreciates against other currencies 10%

B (Currency risks) SEK 2,485 22 – JPY –14,935 –131 1,494 RUB –1,303 –11 130 EUR 7,907 69 –791 CNY –41 0 4 USD 9,676 85 –968 Other –3,440 –30 344 Total C 349 3 214

Read more about the Industrial Operations net financial position on page 83.

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Commercial currency exposure

Transaction exposure from commercial flows

The Volvo Group conducts manufacturing in 18 countries around the globe and more than 90% of net sales are generated in countries other than Sweden. Transaction exposure from commercial flows in foreign currency is generated from internal purchases and sales between manu- facturing units and market companies and external sales and purchases in foreign currency around the globe. As the predominant parts of the operations in the Volvo Group are situated outside Sweden, the fluctua- tions in currency rates affecting the transaction flows in foreign currency are in many cases not against SEK. Industrial Operations transaction exposure in key currencies is presented in table 4:5. The graph repre-

sents the transaction exposure from commercial operating net cash flows in foreign currency, expressed as net surpluses or deficits in key curren- cies. The deficit in SEK and KRW is mainly an effect of expenses for manufacturing plants in Sweden and Korea, but limited external revenues in those currencies. The EUR deficit on the other hand, is the net of sig- nificant gross volumes of sales and purchases made by many entities around the globe in EUR. The surplus in USD is mainly generated from external sales to entities within the US and emerging markets.

The hedging of the Volvo Group’s commercial currency exposure is decided centrally. The Volvo Group’s consolidated currency portfolio exposure is the value of forecasted flows in foreign currency. The Volvo Group only hedge the part of the forecasted portfolio that is considered highly probable to occur, i.e. firm flows, where the main parts will be real- ized within six months. The Volvo Group uses forward contracts and cur- rency options to hedge the portion of the value of forecasted future pay- ment flows in foreign currency. The hedged amount of firm flows for all periods fall within the framework of the Volvo Group’s currency policy. The table 4:2 shows outstanding forward and option contracts for the hedg-

ing of commercial currency risks.

Translation exposure from the consolidation of operating income in foreign subsidiaries

In conjunction with the translation of operating income in foreign subsidiaries, the Volvo Group’s earnings are impacted if currency rates change. The Volvo Group does not hedge this risk. The table 4:7 shows the translation effect

when consolidating operating income for 2015 in foreign subsidiaries in key currencies for Industrial Operations.

Read more in section currency exposure of equity below regarding currency hedging of equity.

Sensitivity analysis- transactional exposure*

The table 4:3 illustrates the impact on operating income if key currencies for

Industrial Operations appreciate by 10% against all other currencies. Hedge accounting is not applied on derivatives hedging cash flows in foreign cur- rency. As a consequence the impact on equity equals the impact on operating income before tax.

The deficit in transaction exposure in SEK is mainly generated from flows in USD, GBP, CAD and EUR against SEK.

Industrial Operations currency review

The tables 4:4 4:5 4:6 4:7 and 4:8 on the next page illustrate the

currency impact on sales and operating income in key currencies. The effect arises from translation during the consolidation of foreign curren- cies and from commercial net flows in foreign currency.

Read more about Industrial Operations transactional exposure in section Commercial currency exposure above.

Financial currency exposure

Loans and investments in the Volvo Group’s subsidiaries are performed mainly in local currencies through Volvo Treasury, which minimizes indi- vidual companies’ financial currency exposure. Volvo Treasury uses vari- ous derivatives to facilitate lending and borrowing in different currencies without increasing the risk for the Volvo Group. The net financial position of the Volvo Group is affected by currency fluctuations since financial assets and liabilities are distributed among the Volvo Group companies that conduct their operations using different currencies.

Table 4:1 discloses the impact on earnings before tax on Industrial

Operations net financial position, excluding pensions and similar net obliga- tions, if SEK were to strengthen by 10%.

Currency exposure of equity

The carrying amount of assets and liabilities in foreign subsidiaries are affected by current exchange rates in conjunction with the translation of assets and liabilities to SEK. To minimize currency exposure of equity, the size of equity in foreign subsidiaries is continuously optimized with respect to commercial and legal conditions. Currency hedging of equity may occur in cases where a foreign subsidiary is considered overcapitalized. Net assets in foreign subsidiaries, associated companies and joint ventures amounted at year-end 2015 to SEK 68 billion (70). The need to undertake currency hedging relating to investments in associated companies, joint ventures and other companies is assessed on a case-by-case basis.

On the map on page 116–117 the Volvo Group’s net assets in different currencies (SEK bn) are displayed.

Read more in Note 30 Financial Instruments about Volvo Group’s policy choice on hedge accounting.

Goals and policies in financial risk management (cont.)

* The sensitivity analysis on currency rate risks is based on simplified assumptions. It is not improbable for the value in a currency rate to appreciate by 10% in rela- tion to other currencies. In reality however, currencies usually do not change in

the same direction at any given time, so the actual effect of exchange-rate changes may differ from the sensitivity analysis. Please refer to tables 4:1 4:3

Risk currency exposure 2015 Transaction exposure from operating net flows Impact on operating income if currency rate appreciates against all other currencies by 10% B (Currency risks) SEK bn SEK  –39.1 -3.9 KRW –8.0 –0.8 EUR –2.4 –0.2 GBP 9.3 0.9 USD 18.9 1.9 Sensitivity analysis*

GROUP PERFORMANCE 2015 NOTES

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