Currency risks 

KONE operates internationally and is, thus, exposed to currency risks arising from exchange rate fluctuations related to currency flows from sales and purchases (transaction risk) and from translation of balance sheet items of foreign subsidiaries into euros (translation risk). During the latter half of the year the currency markets have not functioned as normal, which has made 15.9the hedging of certain currencies more expensive or even practically impossible.

The policy of the Group is to fully hedge the initial transaction exposure. This means that the effect of foreign exchange rate changes on the margin of already contracted and highly probable business deals is eliminated while also giving the business time to react and adapt to changes in the exchange rate levels.

The initial exposure is managed in the business units by taking into account the foreign exchange risk considerations when deciding on the currencies used in export/import pricing and invoicing and by using currency clauses in tenders. The Group companies hedge their firm contracts and estimated quarterly cash flows of highly probable purchases or sales with internal forward contracts and report monthly their transaction risk position to the Group Treasury. Binding contracts are hedged for the whole contract period and estimated sales or purchases for the period of 6 to 9 months. Large tenders are hedged on basis of option strategies. The Group Treasury is responsible for managing the Group’s currency risks externally.

Hedge accounting is applied in subsidiaries having large volume of foreign currency transactions. Other companies do not apply hedge accounting.

The instruments used for cash flow hedging are FX forward contracts. The majority of the hedged cash flows are denominated in USD, GBP, AUD, CNY, RUB, SGD and SEK and they are expected to be realized within one year. A few longer-term projects are estimated to be realized within two years.
The policy regarding translation risks is to hedge the balance sheet structure in such a way that changes in exchange rates have a neutral impact on KONE’s gearing. Balance sheet structure in foreign entities is hedged by using cross-currency swaps, FX forward contracts and loans and deposits denominated in foreign currencies.

Financial instruments’ foreign exchange risk sensitivity analysis according to IFRS 7

The foreign exchange rate sensitivity analysis is based on foreign currency nominated items, other than each Group company’s own functional currencies, in the balance sheet at the closing. However the USD/EUR positions from different countries have been collected to row USD/EUR. The analysis includes only risks arising from financial instruments.

Foreign exchange exposures that are not financial instruments like the forecasted highly probable foreign currency denominated purchases or sales are not included, whereas the financial instruments, like FX forwards used to hedge these exposures, are included in the sensitivity analysis. The reasonable possible change in exchange rates has been estimated to +/- 10 percentage points in the value of the currency against EUR. The largest positions are disclosed in the table below. The table does not include positions between non EUR currencies like SGD/USD, AUD/USD, CNY/USD.

The nominal and fair values of different types of derivative instruments are represented in the section Derivatives.