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Risk Management

Risk Management

Various sources of financial risk inevitably play some part on the Group’s operations by
nature. The Board of Directors is responsible for defining treasury policy measures to
reduce the exposure of risk. The approved treasury policy, outlines the parameters and
framework to which the Group is subject to, when dealing with financial risk arising from
cash, liquidity, asset management and corporate financing. An internal Risk Management
Team, chaired by the CEO , actively controls the risk exposure within the policy limits.
The objectives aimed for, are approached by focusing on and minimising costs arising from
three fundamental financial factors: price volatility, cost of capital and uncertainty.


Foreign currency risk

The Group seeks to reduce its foreign exchange exposure arising from transactions in
various currencies through a policy of matching, as far as possible, receipts and payments
in each individual currency. Never the less, the US dollar cash inflow falls short of dollar outflow
by around US D 100 millions due to fuel costs and capital related payments that are to
a large extent denominated in US dollars. This shortage is financed by a surplus of European
currencies, most importantly the euro but also by the Icelandic and Swedish krona. The
Group follows a hedging policy of 40-90%, 12 months in advance, and uses a portfolio
of instruments, mainly collar options, but also barrier options and forwards.

Fuel price risk

The jet fuel price has proved to be increasingly volatile in recent years. Not only has the
price development been characterised by a steep upward trend, generated by excessive
world demand, but also vicious periodic cycles. Moreover, swap prices have for the
past two years followed a positive curvature as opposed to the more familiar “backwardation”,
which used to be the case. In 2006, the monthly average of jet fuel prices reached
a record level of US D 735 pr tonne in July with swaps trading at US D 850 per tonne,
but in August, oil prices fell by 20% reaching a low in November. Due to the volatility and
expensive swaps, the Group has exchanged the traditional instruments of swaps and collars
for capped swaps and related types of options to acquire improved prices and reduce
the downside risk. The Group follows a policy of 40-80% hedging ratio, 12-18 months in
advance and has recently maintained its ratio closer to the lower boundaries to benefit from
lower prices.

Interest rate risk

The largest share of outstanding loans are directly related to aircraft financing and
denominated in US dollars. This is a consequence of the fact that the most liquid market
for commercial aircraft denominates prices in US dollars. The Group follows a policy of
hedging 40-70% of interest rate exposure of long term financing, 3-5 years in advance.
Currently, only the aircraft loans are hedged against interest rate fluctuations with swap
contracts, where the 6 month floating rate is exchanged for fixed interest rates. Forward
rate agreements and options have occasionally also been used to that end. The contracts
amount to US D 100 million and are currently considerably favourable, as the floating rate
has been increasing in recent years. The average fixed interest rate is 3.59% compared to
the 6 month floating rate, mid year 2006 of 5.11%

Liquidity risk

It is the Group´s policy to keep the equivalent of 20-25% of the Group’s estimated annual
fixed costs in the form of liquid assets.


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