Market risk

Interest rate risk

Interest rate risk is the risk that changes in interest rates will affect the Group’s future earnings and cash flow. Interest rate risk is defined as the possible negative impact on net financial items in case of a one percentage point increase in interest rates across all maturities. The change in fair value related to interest-bearing assets and liabilities including derivatives may not exceed SEK 100 M. Derivative contracts, mainly interest rate swaps and currency swaps, are used as needed to adapt the interest rate refixing period and currency.

The average interest rate refixing period for all interest-bearing assets was 0.3 (0.5) years.  The interest rate for these amounted to 1.22 (0.91) percent at year-end 2011. Of the Group’s total interest-bearing financial assets, 53 (37) percent carry fixed interest rates and 47 (63) per cent variable interest rates.

The average interest rate refixing period for all interest-bearing liabilities was 0.5 (0.9) years. The interest rate for these amounted to 3.02 (3.09) percent excluding derivatives at year-end. Of total interest-bearing financial liabilities, 34 (37) percent carry fixed interest rates and 66 (63) percent variable interest rates.

On December 31, 2011 there was one outstanding interest rate swap contract, amounting to SEK 320 M (400). The contract has an amortizing structure and swaps a fixed interest rate asset to a floating rate. There were also interest rate swap contracts in partly owned joint venture companies.

The fair value of interest-bearing financial assets and liabilities, plus derivatives, would change by about SEK 44 M (62) in case of a one percentage point change in market interest rates across the yield curve, given the same volume and interest rate refixing period as on December 31, 2011. 

Foreign exchange risk

Foreign exchange risk is defined as the risk of negative impact on the Group’s income statement and statement of financial position due to fluctuations in exchange rates. This risk can be divided into transaction exposure, i.e. net operating and financial (interest/principal payment) flows, and translation exposure related to net investments in foreign subsidiaries.

Transaction exposure

Transaction exposure arises in a local unit when the unit’s inflow and outflow of foreign currencies are not matched. Although the Group has a large international presence, its operations are mainly of a local nature in terms of foreign exchange risks, because project revenue and costs are mainly denominated in the same currency. If this is not the case, the objective is for each respective business unit to hedge its exposure incontracted cash flows against its functional currency in order to minimize the effect on earnings caused by shifts in exchange rates. The main tool for this purpose is currency forward contracts.

The foreign exchange risk for the Group may amount to a total of SEK 50 M, with risk calculated as the effect on earnings of a five percentage point shift in exchange rates. As of December 31, 2011, foreign exchange risk accounted for SEK 16 M (45) of transaction exposure.

Contracted net flows in currencies that are foreign to the respective Group company are distributed among currencies and maturities as follows.

Skanska applies hedge accounting mainly in its Polish operations for contracted flows in EUR. The fair value of these hedges totaled SEK -10 M (36) on December 31, 2011.

The hedges fulfill effectiveness requirements, which means that unrealized profit or loss is recognized under “Other comprehensive income.” The fair value of currency hedges for which hedge accounting is not applied totaled SEK -12 M (-3) on December 31, 2011, including the fair value of embedded derivatives. Changes in fair value are recognized in the income statement.

Information on the changes recognized in the consolidated income statement and in “Other comprehensive income” during the period can be found in the table “Impact of financial instruments on the consolidated income statement, other comprehensive income and equity” below.

Translation exposure

Net investments in Commercial Property and Infrastructure Development operations are currency-hedged, because the intention is to sell these assets over time.

To a certain extent, Skanska also currency hedges equity in those markets/currencies where a relatively large share of the Group’s equity is invested. Decisions on currency hedging in these cases are made by Skanska’s Board of Directors from time to time. At the end of 2011, about 29 percent of equity was currency hedged.

These hedges consist of forward currency contracts and foreign currency loans. The positive fair value of the forward currency contracts amounts to SEK 125 M (96) and their negative fair value amounts to SEK 34 M (87). The fair value of foreign currency loans amounts to SEK 822 M (627).

An exchange rate shift where the krona falls/rises by 10 percent against other currencies would have an effect of SEK 1.4 billion on “Other comprehensive income” after taking hedges into account.

Hedging of net investments outside Sweden

*)1 After subtracting tax portion.

Hedge accounting is applied when hedging net investments outside Sweden. The hedges fulfill efficiency requirements, which means that all changes due to shifts in exchange rates are recognized under “Other comprehensive income” and in the translation reserve in equity.