# Foreign Exchange Risk Management Policy

**Talvisto Systems Oy**
Functional and reporting currency: EUR
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 Talvisto Systems Oy ("the Company") identifies, measures, manages and reports foreign-exchange (FX) risk. It applies to the Company and all entities it controls, including its Swedish and US subsidiaries, and to all FX exposures arising from subscription billing, operating costs, financing and cash management.

The Company is headquartered in Helsinki. The functional currency of the parent, and the Group's reporting currency, is the euro (EUR); this reflects the euro-area parent and the concentration of the Group's operating cost base in the euro area, and is confirmed with the Company's auditors.

The policy is approved by the Board. It establishes the framework within which management may transact in foreign currency and hedging instruments. No FX or hedging activity may take place outside this framework.

## 2. Objectives

The Company's FX risk management objectives are to:

- reduce the volatility, in EUR terms, of the Company's net foreign-currency cash flows;
- protect the foreign-exchange rates assumed in the Board-approved operating plan, so that net operating cash flow and runway remain predictable at plan rates; and
- provide certainty that supports commercial and hiring decisions.

The Company hedges only identified, underlying net exposures. **The Company does not take speculative foreign-exchange positions and does not transact in FX for profit.** Hedging is undertaken solely to manage existing or highly probable commercial exposure.

## 3. Governance and responsibilities

| Body / role | Responsibility |
|---|---|
| **Board of Directors** | Approves this policy and the risk limits within it. Reviews FX risk at least annually. |
| **Treasury Committee** | Oversees the operation of this policy between Board reviews. Composition: the CFO, the Head of Finance, and one further independent voice (an audit committee member or external adviser). Quorum: at least two members, including the CFO or the Head of Finance. Meets quarterly, or sooner if triggered by a breach (Section 13). |
| **CFO** | Owns the policy, oversees execution, and reports FX risk to the Board. Approves transactions above the delegated limit. |
| **Treasury / Finance** | Executes hedging within the policy and delegated authority; monitors exposures and limits; prepares reporting. |
| **Segregation of duties** | The functions of dealing, confirmation/settlement, and reconciliation are performed by different individuals. No single person controls a transaction end to end. |

**Delegated authority.** Treasury/Finance 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]. Transactions above that limit require CFO approval. Any transaction outside this policy requires prior Board approval.

## 4. Foreign-exchange risk identification

The Company is exposed to **transaction / cash-flow FX risk** arising from a structural mismatch between the currency of its revenue and the currency of its costs:

- **USD.** The majority of the Company's subscription revenue is priced and billed in USD under signed subscription agreements with customers worldwide. Against this, the Company carries USD-denominated costs: cloud infrastructure and the operating costs of its US subsidiary.
- **SEK.** The Company's Stockholm office - its largest engineering site - creates SEK-denominated payroll and premises costs. Against this, the Company bills its Nordic customers in SEK.
- **EUR.** Euro-denominated revenue and costs (including Helsinki payroll and euro-area vendors) are in the functional currency and carry no transaction FX exposure.

**Net exposure basis.** The Company does not treat revenue and costs as separate gross positions to be hedged independently. For each currency, naturally offsetting flows are netted first: USD costs are deducted from USD revenue, and SEK revenue is deducted from SEK costs. The Company's exposure in any currency is the residual net position after this offset, and only that residual is eligible for hedging. Net exposures are identified from the billing schedule, the contracted subscription base, the payroll register, signed vendor and lease commitments, and the rolling cash-flow forecast, and are quantified monthly by currency and by maturity bucket.

**Highly probable.** A forecast revenue exposure is treated as **highly probable** where it is supported by contracted recurring revenue: amounts scheduled to be billed under signed subscription agreements, within those contracts' committed terms, reduced by the Company's documented trailing-twelve-month gross churn and downgrade rate. Forecast revenue beyond a contract's committed term (an assumed renewal) may be included only to the extent supported by the Company's documented renewal track record, applied on the same net-of-churn basis. New-business pipeline, unsigned expansion and usage-based overage are not eligible, regardless of sales-stage confidence. Each quarter, Treasury/Finance compares actual renewal, churn and downgrade outcomes against the assumption used, documents the comparison, and tightens the classification standard where actual outcomes fall short of the assumption.

A forecast cost exposure is treated as highly probable where it is supported by employment contracts, signed leases or vendor agreements, or by the Board-approved operating plan, and is reviewed on the same quarterly cycle.

Only flows meeting this standard enter the net-exposure calculation above, and only net exposures built from such flows are eligible for the forecast hedge bands in Section 5. This standard is intended to be consistent with the "highly probable" threshold in IFRS 9; its application to hedge accounting is confirmed with the Company's auditors (Section 12).

Translation exposure (from consolidating the Swedish and US subsidiaries) and economic exposure (the long-run competitive effect of USD pricing) are monitored but are not actively hedged under this policy unless specifically approved by the Board.

## 5. Risk appetite and hedging parameters

The Company adopts a **Balanced** risk appetite: coverage sufficient to keep net cash flow predictable against the operating plan, without committing hedge notional against revenue that remains renewal-dependent. Hedging is layered over a rolling 12-month horizon, building coverage as subscription agreements are signed and renewal cohorts complete, rather than in a single transaction.

The following hedge-ratio bands apply by exposure type and tenor. **All ratios apply to the net exposure per currency defined in Section 4.** The Company does not hedge gross revenue or gross costs; hedge notional is sized against the residual net position only.

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

The **Committed / contracted** band applies to in-term contracted billing, net of the Company's documented churn (Section 4): revenue already scheduled to be billed under signed subscription agreements within their committed terms. The **Highly probable forecast** band applies to assumed-renewal revenue that meets the Section 4 highly probable standard - contracted revenue expected on renewal, net of the Company's documented renewal track record - rather than to unsigned pipeline or expansion.

In practice this means the Company sells net USD forward against EUR, and buys net SEK against EUR, within the bands above. Coverage is built in layers to average the entry rate over time and avoid concentrating execution on any single day.

**Absolute maximum tenor.** No hedge may have a maturity beyond **18 months**, regardless of how highly probable (Section 4) the underlying forecast is judged to be. This is a hard ceiling, not a target: the bands above govern how much coverage is built within it. The committed term of a multi-year subscription agreement does not extend the hedging tenor beyond this ceiling; exposures expected beyond 18 months are monitored but are not hedged under this policy.

Where the Company holds a multi-year subscription agreement whose committed term runs beyond 18 months, the contracted revenue in the later years of that agreement - for example, the second and third years of a three-year contract - can meet the Section 4 highly probable standard on its own terms, net of churn, and still fall outside the maximum tenor. That later-year revenue is knowingly left unhedged under this policy, not because the Company doubts it will occur, but because it sits beyond the ceiling the Board has set. This is a deliberate Board-level risk-appetite decision to accept FX exposure on the multi-year tail of its contract book in exchange for a fixed maximum tenor, not an oversight in identifying or measuring the exposure.

## 6. Hedge maintenance and over-hedge remediation

Hedging a forecast exposure creates an ongoing obligation to keep the hedge matched to the exposure over the life of the hedge. Where a hedged forecast transaction is reduced, delayed or cancelled - for example where a large customer terminates or does not renew, a renewal completes below the retention assumption in Section 4, a multi-year agreement is renegotiated to a lower committed value, or offsetting costs in the same currency increase - hedge notional can come to exceed the remaining underlying net exposure. Hedge notional in excess of its underlying is an open position with no economic underlying, and this policy treats it as speculative in substance regardless of how the hedge originated.

To prevent this, Treasury/Finance reconciles hedge notional against current underlying net exposure (Section 4), 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 net exposure for that currency and tenor, as defined in Section 4 ("highly probable"). An operational 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 identifying an over-hedge above the tolerance, Treasury/Finance remediates the excess, in the following 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.** The reconciliation above spans two kinds of exposure, and an over-hedge in each has a different accounting consequence.

**Forecast-hedge portion.** Where the Company applies hedge accounting to a hedge of a highly probable forecast transaction, the reconciliation has accounting consequences. If such a hedged forecast transaction is no longer highly probable but is still expected to occur, hedge accounting is discontinued prospectively for the affected portion - discontinuation follows automatically once the forecast fails the Section 4 test and is not a discretionary de-designation - and amounts already accumulated in the cash flow hedge reserve remain there until the forecast transaction affects profit or loss. If the transaction is no longer expected to occur at all, the related cumulative amount in the cash flow hedge reserve is reclassified to profit or loss immediately. Discontinuing hedge accounting does not terminate the derivative: the Company continues to hold it and, until it is unwound or re-designated, measures it at fair value through profit or loss. Whether hedge accounting is applied to a given hedge, which treatment applies to a given excess, and the accounting consequences of unwinding, holding undesignated or re-designating the derivative, are confirmed with the Company's auditors.

**Committed and contracted portion.** A committed or contracted foreign-currency monetary balance already recognised on the balance sheet - such as a booked payable or receivable - is retranslated at each reporting date through profit or loss under IAS 21, whether or not hedge accounting is applied; a derivative held against it and measured at fair value through profit or loss moves through profit or loss in the same period, so the two are already largely offsetting, and many companies do not designate hedge accounting for a hedge of a recognised item at all. Where a hedge is placed against a firm, uncancellable commitment that is not yet recognised - for example contracted future billing under a signed, committed-term subscription agreement that has not yet been invoiced - IFRS 9 allows the foreign-exchange risk on that commitment to be designated as either a fair value hedge or a cash flow hedge; which designation, if any, the Company applies is a matter for the Company and its auditors. In either case an over-hedge - hedge notional exceeding the committed or contracted underlying - remains an open position in substance and is reconciled, tolerance-tested and remediated exactly as set out above; only the accounting consequence of unwinding, holding undesignated or re-designating the derivative differs, and those consequences are confirmed with the Company's auditors.

A single hedge may cross between these two treatments over its life - for example a forecast hedge that continues in place after the forecast transaction is recognised as a payable or receivable, or a single forward covering a layered exposure that is part committed and part forecast at once. Where this occurs, the point at which one treatment gives way to the other is confirmed with the Company's auditors; this policy does not attempt to fix it.

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, and vanilla FX options, used solely to hedge identified underlying exposure.

**Options ring-fence.** Only vanilla options are permitted; exotic, barrier, digital or other non-vanilla structures are prohibited. The Company buys options (pays premium) to hedge exposure; it does not write or sell options. Selling options generates premium income that can create an incentive to write positions for yield rather than to hedge, and this is therefore not a permission under this policy. The notional of any option, like any forward or swap, may never exceed the underlying exposure it hedges: the Company does not hold option notional, forward notional, or a combination of the two, in excess of its underlying exposure.

**Prohibited:** structured, leveraged, or path-dependent products of any kind; written or sold options; and any instrument or position that exceeds, or is not matched to, an underlying exposure. The notional and maturity of a hedge may not exceed the exposure it covers.

## 8. Counterparty and credit risk

FX and hedging transactions are executed only with the Company's approved relationship banks. The Company maintains, or will put in place, ISDA Master Agreements (and CSAs where appropriate) with its hedging counterparties [to be confirmed].

**Minimum counterparty credit standing.** Hedging counterparties are expected to hold a credit rating of [investment grade, e.g. BBB-/Baa3 or above from a major rating agency - to be confirmed by the Board], or to be one of the Company's principal relationship banks used regardless of rating where no alternative counterparty is realistically available [to be confirmed by the Board].

**Concentration.** No more than [X]% of hedge notional outstanding is held with a single counterparty [to be confirmed by the Board], other than where the Company's relationship-bank structure makes this impractical.

**Downgrade.** Where a counterparty is downgraded below the minimum standing above, the Company does not enter into new transactions with that counterparty until its standing has been reviewed by the CFO [or Board]. Existing positions with the downgraded counterparty are assessed but are not automatically unwound: an unwind can itself crystallise a loss at a badly-timed moment, so any unwind decision is made deliberately by the CFO [or Board], not triggered automatically by the downgrade alone.

Exposure is spread across more than one counterparty where practical to avoid undue concentration, and counterparty standing is reviewed at least annually, or sooner if market conditions or the counterparty's public credit standing changes materially.

Where either of the above exceptions applies - the minimum-rating carve-out or the concentration carve-out - the Board confirms at least annually that the exception remains necessary and that the resulting concentration is understood and accepted, rather than the exception becoming the default position 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 of traded notional, referenced to executable rates and never to the mid) and reports it to the Board (Section 10).

## 10. Measurement, valuation and reporting

The Company measures and reports the following on a **quarterly** basis to the Board (and monitors them monthly internally):

- **Hedge ratio** by currency and maturity bucket, on the net-exposure basis in Section 4, against the bands in Section 5;
- **Mark-to-market** of the open hedge portfolio;
- **Downside sensitivity** of the unhedged residual exposure to a defined adverse move (for example a 10% adverse move in EUR/USD and EUR/SEK), reported as the cash impact in EUR. Where the Company computes Value at Risk, it is stated with its confidence level, horizon and basis (for example 95%, one month, historical simulation), not as a bare figure;
- **Realised FX execution cost** versus the independent benchmark (Section 9);
- **Forecast accuracy**: actual renewal, churn and downgrade outcomes for each quarter measured against the net-of-churn contracted-revenue assumption (Section 4) used to set hedge notional, and actual operating costs against the plan-based cost assumption. This is the standing check that the "highly probable" standard is holding, and it feeds the quarterly review in Section 4;
- **Cost of carry / total hedging cost** (including forward points and option premium paid) as a percentage of hedged notional; and
- **Time-weighted achieved hedge rate** versus the operating-plan rate, by currency.

Where hedge accounting is applied (Section 12), hedge effectiveness is also reported.

Material breaches of the policy bands or limits are reported to the CFO immediately and to the Board at the next meeting (Section 13).

## 11. Stress testing

In addition to the downside-sensitivity metric in Section 10, the Company stress-tests its FX risk against a small set of adverse scenarios at least annually, or when its risk profile changes materially - for example a significant change in exposure, counterparty base, or market conditions. This is a broader check on resilience than the standing sensitivity metric, which measures a single defined shock; stress testing considers scenarios that could compound.

As a minimum, the Company's stress testing covers:

- the same defined adverse FX move used in the downside-sensitivity metric (Section 10), applied across the full hedged and unhedged portfolio; and
- at least one combined scenario, such as an adverse move in EUR/USD occurring at the same time as a retention shortfall materially below the Section 4 assumption - which would reduce the hedged underlying revenue and require remediation under Section 6 at unfavourable rates - or coinciding with delayed collection of large enterprise renewals, reducing the liquidity available to meet settlement obligations. A hedging-counterparty default coinciding with an adverse move may be substituted or added as a combined scenario.

Results are reviewed by the Treasury Committee and reported to the Board at least annually, or sooner if a stress test identifies a material vulnerability.

## 12. Accounting treatment

The Company may apply hedge accounting under IFRS 9 where hedges qualify and where doing so reduces accounting volatility. The specific designation and documentation, including the application of the Section 4 "highly probable" standard to designated hedges, are to be confirmed with the Company's auditors. This policy does not determine the accounting treatment.

## 13. Compliance, limits and breach escalation

Treasury/Finance monitors exposures, hedge ratios and limits against this policy and records compliance. A **breach** is any hedge ratio outside the approved band (Section 5), any hedge maturity beyond the absolute maximum tenor (Section 5), an over-hedge above the tolerance in Section 6, any transaction in a prohibited instrument (Section 7), any position exceeding its underlying net exposure, or any transaction above the delegated authority without the required approval.

On identifying a breach, Treasury/Finance escalates to the CFO without delay. The CFO determines remedial action, informs the Treasury Committee, and reports the breach and remedy to the Board at the next meeting. Repeated or material breaches trigger a review of controls.

## 14. Policy review and approval

This policy is reviewed at least annually by the CFO, endorsed by the Treasury Committee, and re-approved by the Board, or earlier if there is a material change in the Company's exposures, strategy, or the market environment.

| | |
|---|---|
| Policy owner | CFO |
| 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.*