Audited by PwC

Financial risk factors

Novozymes’ international operations mean that the income statement and balance sheet are exposed to a number of financial risk factors. Financial risks are managed centrally for the entire Group. The use of financial instruments is governed by the treasury policy approved by Novozymes’ Board of Directors. The treasury policy is unchanged from previous years, and contains rules for which the financial instruments that can be used for hedging, the counterparties that can be used, and the risk profile that is to be applied. Financial instruments are used to hedge existing assets, liabilities, and expected future net cash flow.

Currency exposure
Currency exposure arises due to imbalances between income and costs in each individual currency and because Novozymes has more assets than liabilities in foreign currencies in connection with its many foreign companies. Operating profit is most exposed to the EUR, USD, and JPY.

A 2.25% movement in the EUR would, other things being equal, result in a change in operating profit of around DKK 50–60 million. A movement of 5% in the USD would result in a change in operating profit of around DKK 45–65 million. A movement of 5% in the JPY would result in a change of around DKK 5–10 million.

Novozymes’ policy is to hedge existing net assets in foreign currencies and expected future net exposure from the Group’s operations. Hedging of exchange rate exposure is carried out through a combination of currency loans, forward exchange contracts, currency swaps, and options. The exchange rate hedging transactions are carried out to minimize risks and thereby increase the predictability of the Group’s financial results.

Currency exposure relating to investments in foreign subsidiaries is hedged where this is deemed appropriate. Currency exposure is managed primarily by taking out currency loans and entering into currency swaps. Currency swaps, which are used to hedge participating interests, generally have a maturity period of over 12 months.

Interest rate exposure
Interest rate exposure arises in relation to interest-bearing assets and liabilities. A change of 1 percentage point in the average interest rate on Novozymes’ net interest-bearing assets would have an effect on profit before tax of around DKK 15 million. In accordance with Novozymes’ treasury policy, a minimum of 30% of loans must be at fixed interest rates. At year-end 2008, 41% of the loan portfolio was at fixed interest rates, based on financial instruments.

According to Novozymes’ treasury policy, free funds may only be invested in government bonds, ultra-liquid mortgage credit bonds, and money market deposits.

Credit risk
Credit risk occurs especially on cash and cash equivalents, derivatives, and customer sales. The credit risk on cash and cash equivalents is managed by dealing in financial instruments and placing deposits only with banks that have a credit rating of at least A2 (Moody’s) or A (S&P). The credit risk is calculated on the basis of net market values and is governed by the Group’s treasury policy. Novozymes has entered into netting agreements (ISDA) with all the banks used for dealing in financial instruments, which means that Novozymes’ credit risk is limited to net assets. At December 31, 2008, the maximum credit risk related to one counterparty was DKK 332 million. The credit risk of debtors is countered by thorough, regular analyses based on customer type, country, and specific conditions. Generally, customers are creditworthy.

Liquidity risk
In connection with the Group’s ongoing financing of operations, including refinancing risk, efforts are made to ensure adequate and flexible liquidity. This is guaranteed by placing deposits in cash and ultra-liquid negotiable instruments, and using binding credit facilities.

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