Risk Management
The Landsvirkjun Board of Directors formulates risk management strategy and defines acceptable risk levels in each risk category.
Decision making and supervision of risk management are the responsibility of the Risk Management Committee, which consists of the Managing Director, the Deputy Managing Director and the Chief Financial Officer. The Managing Director is the chairman of the Risk Management Committee.
Day-to-day risk management is the responsibility of the head of Risk Management. The main task of Risk Management is to identify and manage Landsvirkjun's risks for the purpose of securing the company's operating results and cash flow. Risk Management regularly presents reports to the Risk Management Committee and Landsvirkjun's Board, where the company's risk and the success of Risk Management are assessed.
Landsvirkjun's financial risk
Active risk management is applied to try to reduce uncertainties in the company's cash flow and financial position. Risk stems from adverse developments in financial risk factors, which have been defined as changes to global aluminium prices, interest rate risk, exchange rate risks and liquidity risks.
Counterparty risk is also regarded as a financial risk. Risks relating to counterparties in contracts have been limited through requirements made by the company regarding their quality.
Aluminium price risk
Landsvirkjun's aluminium price risk is defined as the risk that aluminium price changes will adversely affect the company and lead to financial losses; most of the company's major industrial contracts are linked to aluminium prices. Management of aluminium price risk involves evening out fluctuations in performance and cash flow by means of derivatives agreements in accordance with the company's authorisations and long-term goals.
Interest rate risk
Interest rate risk is the risk of financial loss due to changes in interest rates. Landsvirkjun is exposed to interest rate risk as a result of interest bearing assets and debts. Financial debts are considerably higher than interest bearing financial assets. Landsvirkjun's risk in cases with fixed interest involves the fact that interest rates may be lower in the future, and the company will then have to bear higher financial costs than would otherwise be the case. As regards financial instruments with variable interest, the risk is that interest rates will rise. Most of the company's loans bear variable interest. As a result, most the risk is tied to possible increases in interest rates.
Foreign exchange risk
Foreign exchange risk is the risk of financial loss due to adverse changes in currency exchange rates. Payment and settlement risks are taken into account when assessing Landsvirkjun's exchange rate risks.
The company's payment risk involves a possible decrease in income or an increase in costs due to adverse developments in foreign currency exchange rates, exchange rate losses from investment or the sale of assets and instalments on loans in currencies other than USD.
Landsvirkjun's settlement risk involves imbalances in assets and debts by currency and the effects of changes in the currency exchange rates on the standing of the company's balance sheet.
Liquidity risk
Liquidity risk is defined as the risk of having insufficient liquid funds in the company to meet payment obligations on time. Management of liquidity risk involves ensuring the availability of sufficient liquid funds to meet all the company's financial obligations and ensuring the best balance possible between commitments and anticipated cash flow.