Risk management in Hydro is based on the principle that risk evaluation is an integral part of all business activities. The main responsibility for risk management is therefore placed with the business areas and coordinated by staff units at corporate level. Policies and procedures have been established to manage risk. Hydro's Board of Directors regularly reviews and evaluates the overall risk-management system and environment within Hydro.
Hydro faces many risks and uncertainties within its worldwide business operations and the global marketplace. We are exposed to changing economic and market conditions and may not succeed in reducing the cost of our asset portfolio sufficiently to compensate for future market declines. The Vale aluminium acquisition represents a significant portion of Hydro's capital employed and we face risks and challenges integrating the operations into our existing business. A deterioration of Hydro's financial position or downgrade of the company's credit ratings could increase our borrowing cost and cost of capital. We face an ongoing risk of counterparty default. Price volatility can have a significant impact on Hydro's reported and operating results. Hydro's reported and operating results and competitive position are influenced by developments in currency exchange rates and in particular the U.S. dollar, Brazilian real, Euro and Norwegian krone. Hydro is exposed to increasingly onerous legislation on reducing CO2 emissions. Major accidents, legal proceedings or investigations and incidents relating to HSE and corporate responsibility could impose significant costs and substantially damage the company's reputation.
Hydro's main strategy for mitigating risk related to volatility in cash flows is to maintain a solid financial position and strong creditworthiness. In order to protect processing and manufacturing margins against raw material price fluctuations, our downstream and other margin-based operations are hedged to a certain extent. Hydro also uses derivatives to reduce its overall financial and commercial risk exposures, for example, in connection with the acquisition of the Vale aluminium assets. Forward U.S. dollar currency contracts have been used and Hydro has, to a limited extent, entered into forward contracts in other currencies to hedge certain revenue and cost positions. No major currency-forward contracts were outstanding at the end of 2010.
