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Financial risks

The objective of the Group's financial risk management is to decrease the negative effects of market and counterparty risks on the Group's profits and cash flows and to ensure sufficient liquidity.

The Group is exposed to many different financial risks in its operations. Such risks include foreign currency, credit and liquidity risks. These and other financial risks are described in more detail below and in the Annual Financial Statements.

The main principles for financial risk management are defined in the Group Treasury Policy, any changes to which are approved by either the Board of Directors of the parent company or the President and CEO. The Group Treasury is responsible for Group Treasure Policy implementation. Treasury activities are centralised in the Group Treasury.

Market risk

The Group is exposed to market risks related to foreign currency exchange rate, market interest rate and electricity price.

Foreign currency exchange rate risk

The Group's foreign currency exchange rate risk consists of transaction risk and translation risk.

Transaction risk

Transaction risk arises from operational items (such as sales and purchases) and financial items (such as loans, deposits and interest flows) in foreign currency in the statement of financial position, and from forecast cash flows over the upcoming 12 months. Transaction risk is monitored and hedged actively. Further details about the transaction risk are provided in the annual Financial Statements. 

Translation risk

Translation risk arises from the equity of subsidiaries outside the eurozone. Further details about the translation risk are provided in the annual Financial Statements.

Electricity price risk

The price risk refers to the risk resulting from changes in electricity market prices. The market price of electricity fluctuates greatly due to weather conditions, hydrology and emissions trading, for example. The Group obtains its electricity through deliveries that are mainly fixed-price contracts or tied to the spot price of the price area of Finland, and in the latter case is therefore exposed to electricity price fluctuation. This price risk is not hedged.

Interest rate risk

Changes in interest rates affect the Group's cash flow and results. Further details about the translation risk are provided in the annual Financial Statements. 

Counterparty risk

Counterparty risk is realised when a counterparty to the Group does not fulfil its contractual obligations, resulting in non-payment of funds to the Group. The main risks relate to trade receivables, cash and cash equivalents, and money market investments. Further details about the counterparty risk are provided in the annual Financial Statements.

Liquidity risk

The Group seeks to maintain a good liquidity position in all conditions. This is ensured by cash flows from operating activities and cash and cash equivalents and other money market investments. In addition, the Group has undrawn bank overdraft limits and a EUR 100 million unconfirmed commercial paper programme. Further details about the liquidity risk are provided in the annual Financial Statements.

Management of capital structure

The financial objectives of the Group include a capital structure related goal to maintain the equity ratio, i.e. equity in proportion to total assets, at a level of at least 50%. This equity ratio is not the Company’s opinion of an optimal capital structure, but rather part of an aggregate consideration of the Company’s growth and profitability targets and dividend policy. Further details about the management of capital structure is provided in the annual Financial Statements.