Financial Statements - Solvay

) Balance sheet risk
The Group’s net assets (EUR 4.7 billion at end 2008) are distributed as follows, by reducing order of importance:
• Euro Zone: 48 %
• NAFTA: 30 %
• Brazil and Argentina: 7 %
• Asia-Pacifi c: 6 %
• Bulgaria: 3 %
• Great Britain: 2 %
• Other: 4 %
In all the Group is exposed to 30 currencies in the NAFTA region, Latin America, Asia and Eastern Europe.
A VaR (Value at Risk) analysis has been carried out to quantify the balance sheet risk. Based on market expectations for
the volatility of the currency pairs, the VaR (EUR 770 million) appears to be close to 16 % of the Group’s current equity
within a 99 % confi dence interval. This risk has increased compared with the end of 2007 (EUR 298 million) owing mainly
to the very high volatility observed on foreign exchange markets at the end of 2008.
Measures to hedge equity have not been considered.
Managing the transactional exchange risk
This is the exchange risk linked to a specifi c transaction, such as a Group company buying or selling in a currency other
than its functional currency.
a) Hedging transactional exchange risk when certain
Subsidiaries are required to transfer their foreign exchange positions (e.g. customer invoices, supplier invoices) when
certain, to Solvay CICC 1 . This systematic hedging centralizes the Group’s foreign exchange position at CICC and relieves
operating subsidiaries of the administrative burden of exchange risk management.
CICC’s foreign exchange position is then managed under rules and specifi c limits which have been set by the Group.
The main management tools are the spot and forward purchase and sale of currencies.
b) Hedging forecast short / medium-term foreign currency fl ows
Forecasted foreign currency fl ows are regularly mapped, by SBU, in order to measure the Group’s expected exposure
to transactional exchange risk on an annual horizon. Based on current risk management policy, the hedging amount is
up to 75 % of the expected foreign currency fl ows as mapped on an annual basis.
In its present structure, the Group’s exposure is essentially linked to the EUR / USD risk: the Group is “long” in
USD by around USD 740 million a year as the Group’s overall activities generate a net positive USD fl ow. Based on
this mapping and depending on market conditions, foreign exchange hedging can be carried out on the basis of expected
fl ows. The main fi nancial instruments utilized are forward currency sales and the purchase of put options. The Group
covered its 2008 exposure in an amount of USD 450 million. The Group is exposed to currency exchange risks for other
currencies for which the risk is considered minimal, with the exception of the yen (JPY 18 billion “long” exposure).
By using fi nancial instruments to cover its medium-term currency exchange risk, Solvay is exposed to the risks attached
to these foreign currency derivatives. From the accounting point of view, the covering operation is preferably documented
in a way that enables it to be treated as a perfect hedge.
Changes in the exchange rates of the currencies on which these transactions are based impact the fair value differences
in equity as well as the fair values of these hedging instruments. Upon maturity, the gains and losses on these fi nancial
instruments are recognized in the gross margin.
1. Solvay Coordination Internationale des Crédits Commerciaux, SA.
Financial
101
Solvay Global Annual Report 2008
Financial