# Foreign Exchange Risk Management Policy

**Sundell Trading AB**
Functional currency: SEK
Version: 1.0 (draft for Board approval)
Effective date: [on Board approval]
Next review: 12 months from approval

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## 1. Purpose and scope

This policy sets out how Sundell Trading AB ("the Company") identifies, measures, manages and reports foreign-exchange (FX) risk. It covers all FX exposure arising from the Company's commercial activity, financing and cash management.

The Company has no treasury department and no treasury management system. FX is handled by one person, the Finance Manager, alongside their other finance duties. This policy is written for that reality. Every control that protects the Company from speculation applies in full.

The Board approves this policy. All FX and hedging activity takes place inside it. There is no FX activity outside this policy.

## 2. Objectives

The Company manages FX risk to:

- reduce the volatility of cash flows from foreign-currency supplier payments and highly probable forecast purchases;
- protect the exchange rates assumed in the approved budget; and
- keep FX outcomes predictable enough that they never distort a commercial decision.

The Company hedges only identified, underlying exposures. **The Company does not take speculative foreign-exchange positions and does not transact in FX for profit.** No one at the Company, at any level, takes a view on where a currency is going and puts the Company's money behind it. Hedging exists to protect the business the Company already has or is highly likely to have, and for no other reason.

## 3. Governance and responsibilities

- **The Board** approves this policy and the limits in it, and reviews FX risk at least annually.
- **The Managing Director** approves transactions above the delegated limit, acts as the second reviewer on every transaction (below), and brings breaches to the Board.
- **The Finance Manager** is the person responsible for FX. They identify exposures, execute hedges within this policy, run the monthly reconciliation in Section 6, and prepare the reporting in Section 10.

**Delegated authority.** The Finance Manager may execute hedges in permitted instruments, within the bands in Section 5, up to a single-transaction limit of [approval limit, set by the Board]. Anything above that limit needs the Managing Director's approval first. Anything outside this policy needs prior Board approval.

**Segregation of duties and the compensating control.** In a larger company, dealing, settlement and reconciliation are done by different people so that no single person controls a transaction end to end. At the Company, all three sit with the Finance Manager, so true segregation is not achievable. The compensating control is:

> The Managing Director reviews and confirms every FX transaction before it settles. On the day a deal is done, the Finance Manager sends the Managing Director the deal details: currency pair, amount, rate, maturity, counterparty, and the underlying exposure it hedges. The Managing Director confirms in writing before settlement. No FX transaction settles without that confirmation.

This control is not optional and is never skipped for speed or convenience. A transaction that settles without the Managing Director's confirmation is a breach under Section 13.

## 4. Foreign-exchange risk identification

The Company earns its revenue in SEK from Swedish customers and pays overseas suppliers mainly in **USD and EUR**. Its FX risk is transaction risk: the SEK cost of a foreign-currency supplier payment moves between the day the purchase is committed and the day it is paid.

The Finance Manager identifies exposures from the purchase ledger, supplier orders placed, and the rolling purchase forecast, and quantifies them monthly by currency and by maturity bucket.

A forecast exposure is treated as **highly probable** where it is backed by a signed customer contract, a purchase order the Company has placed, or a supplier order the Company is contractually committed to. A forecast with none of these behind it is a plan, and plans are not hedged under this policy. This definition is used throughout the document; wherever "highly probable" appears, it means this.

The Company has no foreign subsidiaries, so translation exposure does not arise. Long-run economic exposure (competitiveness against FX over time) is a matter for pricing and sourcing decisions, and is monitored but not hedged under this policy.

## 5. Risk appetite and hedging parameters

The Company adopts a **Balanced** risk appetite. Coverage is built in layers over a rolling 12-month horizon, adding hedges as exposures firm up, rather than in single large transactions.

The following hedge-ratio bands apply, measured against net exposure per currency:

| Exposure | Horizon | Hedge ratio band |
|---|---|---|
| Committed / contracted | 0 - 12 months | 60% - 90% |
| Highly probable forecast (Section 4) | 6 - 12 months | 25% - 60% |
| Forecast | beyond 12 months | 0% - 30% |

Offsetting flows in the same currency are netted before hedging.

**Absolute maximum tenor.** No hedge may have a maturity beyond **18 months**. This is a hard ceiling, not a target, and it holds regardless of how highly probable (Section 4) the underlying forecast is judged to be. However confident the Finance Manager is about an exposure two years out, it is monitored, and hedged only once it comes inside the ceiling. That means exposure beyond 18 months is knowingly left unhedged under this policy. The Board should read that plainly: carrying that unhedged tail, rather than locking the Company into long-dated hedges against forecasts that may not hold, is a deliberate risk-appetite decision the Board is making, not an oversight.

## 6. Hedge maintenance and over-hedge remediation

A hedge is only a hedge while there is real exposure underneath it. When a hedged forecast shrinks - a supplier order is cut, a customer cancels, volumes come in low - the hedge can end up larger than the exposure it was meant to cover. That excess is an open position with nothing underneath it, and this policy treats it as speculative in substance, however the hedge originated.

For a one-person finance function this section matters more, not less: there is no second desk that will notice a hedge drifting away from its exposure. The reconciliation below is what notices.

The person responsible for FX reconciles hedge notional against current underlying exposure, by currency and maturity bucket, on a **monthly** basis, as part of the exposure review in Section 4.

An over-hedge exists where hedge notional for a currency and tenor exceeds 100% of the current underlying exposure for that currency and tenor, as defined in Section 4 ("highly probable"). A tolerance of up to **105%** of the underlying is permitted, to absorb ordinary forecast variation and netting timing, and does not by itself require action. Hedge notional above the tolerance must be remediated within **30 days, or by the next reconciliation, whichever is earlier**.

On finding an over-hedge above the tolerance, the person responsible for FX fixes it in this order of preference:

1. re-designate the excess against another highly probable forecast exposure in the same currency, where one exists within the original hedge horizon;
2. unwind or reduce the excess hedge, crystallising the resulting gain or loss; or
3. hold the excess undesignated as a short-term measure within the remediation window only, and never as a continuing position.

The Company does not hold hedge notional in excess of its underlying exposure as a standing position.

**Accounting.** This is the densest part of the policy; a reader who does not want to work through every case can hand this block straight to the Company's accountant. The Company hedges two kinds of exposure - booked supplier payables and highly probable forecast purchases (Section 4) - and an over-hedge in each is found and fixed the same way, but the accounting behind the fix works differently.

**Forecast hedges.** If the Company applies hedge accounting to a hedge of a forecast purchase, the reconciliation above has accounting consequences, and they are not optional. When a hedged forecast stops being highly probable (Section 4), hedge accounting is discontinued from that point forward for the affected portion. That is not a choice anyone makes: it follows automatically from the forecast failing the test. What happens next to the gains and losses already sitting in the cash flow hedge reserve depends on the forecast. If the purchase is still expected to happen, just smaller or later, those amounts stay in the reserve until the purchase hits profit or loss. If the purchase is no longer expected to happen at all, they go to profit or loss immediately. Discontinuing hedge accounting does not get rid of the hedge itself: the derivative still exists, the Company still holds it, and until it is unwound or re-designated its fair-value movements run through profit or loss. Which of these applies in a given case, and the accounting effect of unwinding, holding undesignated, or re-designating against a new qualifying exposure, is confirmed with the Company's auditors before acting.

**Booked payables and firm orders.** A supplier payable already on the books works differently. Under IAS 21 it is retranslated through profit or loss at every reporting date, hedged or not - the accounting does that on its own. A forward held against it also runs through profit or loss each period, so the two movements already largely offset, and many companies never apply formal hedge accounting to hedges of booked balances at all. Where the Company hedges a firm, signed order that is not yet on the books, IFRS 9 allows the FX risk on that commitment to be designated as either a fair value hedge or a cash flow hedge; whether to designate, and which way, is a decision for the Company and its auditors. In either case an over-hedge - hedge notional above the booked or committed amount - is still an open position and goes through exactly the same reconciliation, tolerance and remediation as above; only the accounting effect of the fix differs, and that is confirmed with the Company's auditors.

A single hedge can also cross from one of these worlds into the other over its life - most obviously when a forecast the Company hedged becomes a signed order and then a booked payable while the forward is still running. When that happens, the point at which one treatment gives way to the other is a question for the Company's auditors; the Finance Manager asks, and does not work it out alone. This policy does not determine the accounting treatment.

An over-hedge above the tolerance is a breach for the purposes of Section 13 and is escalated accordingly.

## 7. Permitted and prohibited instruments

**Permitted:** FX spot, FX forwards, and FX swaps, used solely to hedge identified underlying exposure.

**Prohibited:** options, unless and until specifically approved by the Board; structured, leveraged, or path-dependent products of any kind; and any instrument or position that exceeds, or is not matched to, an underlying exposure. The notional and maturity of a hedge may never exceed the exposure it covers.

Banks and brokers will from time to time offer products beyond this list, often described as cost reductions or enhanced hedges. The Finance Manager declines them. If a product looks genuinely useful, it goes to the Board for approval before any transaction, never after.

## 8. Counterparty and credit risk

A hedge is a promise from a bank, and it is only worth what the bank behind it is worth. The Company deals FX only with its approved relationship banks, and maintains, or will put in place, an **ISDA Master Agreement** (the standard contract that governs FX and derivative trades with a bank, usually already signed as part of onboarding - check with the relationship manager if unsure) and a **CSA** where appropriate (a collateral annex to that agreement, only relevant if the bank asks the Company to post collateral against open positions) with each of them [to be confirmed].

**Minimum credit standing.** A bank the Company hedges with should hold a credit rating of [investment grade, e.g. BBB-/Baa3 or above from a major rating agency - for the Board to confirm]. One exception: a principal relationship bank may be used regardless of rating where the Company has no realistic alternative [for the Board to confirm]. That exception is a carve-out the Board owns and reconfirms, below.

**Concentration.** The Company does not put all its hedges with one bank. No more than [X]% of hedge notional outstanding sits with a single counterparty [for the Board to confirm], and exposure is spread across more than one bank where practical. Where the Company's banking setup makes this impractical, that too is a carve-out the Board accepts knowingly and reconfirms, below.

**Downgrade.** If a bank falls below the minimum standing, the Finance Manager stops placing new trades with it until the Managing Director [or Board] has reviewed it. Existing hedges with that bank are assessed but are not automatically unwound: unwinding can crystallise a loss at exactly the wrong moment. Whether to unwind is a deliberate decision by the Managing Director [or Board], never an automatic consequence of the downgrade alone.

**Review.** The Finance Manager reviews counterparty standing at least annually, and sooner if market conditions or a bank's public credit standing changes materially. A downgrade in the news does not wait for the annual check. Where either carve-out above is in use - the below-minimum-rating bank or the concentration exception - the Board confirms at least annually that it is still necessary and still accepted, so the exception stays a decision rather than becoming the default by inaction.

## 9. Execution standards and independent oversight

The Company executes FX on a **best-execution** basis and aligns its dealing conduct with the principles of the **FX Global Code**.

The cost of FX is embedded in the rate the Company is offered and is not separately invoiced. The Company cannot manage a cost it does not independently measure. The Company therefore **measures its realised execution cost against fair, tradable reference rates** - expressed in **PPM** (parts per million of the traded notional - the same idea as a basis point, just a finer unit: 1 basis point = 100 PPM), referenced to executable rates and never to the mid - and reports it to the Board (Section 10).

## 10. Measurement, valuation and reporting

The Company keeps its FX measurement to what one person can genuinely sustain, and does all of it.

**Monthly**, as part of the reconciliation in Section 6, the Finance Manager checks:

- hedge notional against current exposure, by currency and maturity bucket; and
- the hedge ratio per currency against the bands in Section 5.

**At least [quarterly]**, the Finance Manager reports to the Board:

- the hedge position by currency and maturity, against the Section 5 bands;
- the mark-to-market of open hedges, using the counterparty banks' valuations; and
- the two KPIs below.

**Once a year**, the Finance Manager:

- runs a downside spot-check: what a **10% adverse move in SEK against USD and EUR** would cost the Company at current exposure, hedged and unhedged, reported as the SEK cash impact. This is a spot-check reviewed with the Managing Director and reported to the Board, in place of a standing quarterly sensitivity metric the Company would not realistically keep up; and
- reviews the Company's realised FX execution cost against fair, tradable reference rates (Section 9) and reports the result to the Board.

**KPIs.** The Company tracks two:

- **Forecast accuracy** - actual foreign-currency payments versus the forecast the hedges were based on, by currency. This supports the highly probable standard in Section 4 and is the early warning for the over-hedge risk in Section 6.
- **Achieved hedge rate versus budget rate** - the rate achieved on hedged flows against the rate assumed in the approved budget.

Both are calculable from the purchase ledger and the hedge log, with no treasury system required.

Material breaches of the policy bands or limits are reported to the Managing Director immediately and to the Board at the next meeting.

## 11. Stress testing

In addition to the annual downside spot-check in Section 10, once a year the Finance Manager checks what the same 10% adverse move in SEK against USD and EUR would cost if it landed at the same time as a payment from a major customer being delayed - the situation where the Company would have to fund large foreign-currency supplier payments at a bad rate while its own cash inflow is late. The result is a single SEK figure for the combined squeeze, hedged and unhedged.

The Finance Manager reviews the result with the Managing Director, and it is reported to the Board at least annually, or sooner if the check identifies a material vulnerability. The check is also rerun when the Company's risk profile changes materially, for example a significant new supplier currency or a change of bank.

## 12. Accounting treatment

The Company may apply hedge accounting under IFRS 9 where hedges qualify and where doing so reduces accounting volatility. Whether to apply it, and the designation and documentation involved, are confirmed with the Company's auditors. This policy does not determine the accounting treatment.

## 13. Compliance, limits and breach escalation

The person responsible for FX monitors exposures, hedge ratios and limits against this policy and keeps a record of compliance. A **breach** is any of:

- a hedge ratio outside the approved bands in Section 5;
- a hedge beyond the 18-month maximum tenor in Section 5;
- an over-hedge above the 105% tolerance in Section 6;
- a transaction in a prohibited instrument (Section 7);
- any position exceeding its underlying exposure;
- a transaction above the delegated limit without the required approval; or
- a transaction that settles without the Managing Director's confirmation (Section 3).

On identifying a breach, the Finance Manager tells the Managing Director without delay - including where the Finance Manager caused it. The Managing Director decides the remedial action and reports the breach and the remedy to the Board at the next meeting. Repeated or material breaches trigger a review of the controls in this policy.

## 14. Policy review and approval

This policy is reviewed at least annually by the Managing Director and the Finance Manager together, and re-approved by the Board, or earlier if there is a material change in the Company's exposures, banks, or the market environment.

| | |
|---|---|
| Policy owner | Managing Director |
| Operated by | Finance Manager (person responsible for FX) |
| Approved by | Board of Directors |
| Approval date | [date] |
| Version | 1.0 |
| Next review | [approval date + 12 months] |

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*This policy is a template to be reviewed and adopted by the Company's board and advisers. It is not legal, accounting, or investment advice.*