Because financial instruments are used, the Group is exposed to the following risks:

• Market risks, consisting of:

• • Interest-rate risk

  • Currency risk

  • Price risk for energy

• Credit risk

• Liquidity risk

• Insurance risks

• Risks deriving from cross-border transactions

Risk management framework

The Executive Board bears the final responsibility for setting up and monitoring the Group’s risk management framework. The Risk and Audit Committee and the Supervisory Board make sure that the risk management framework is adequate in view of the risks to which the Group is exposed. The Group’s Risk and Audit Committee is supported in its supervisory role by NS Audit, NS Risk and the Group Control & Expertise department. NS Audit provides additional assurance concerning the proper control of all the NS business processes by performing regular and ad hoc evaluations. The findings of NS Audit are reported to the Risk and Audit Committee.

The Group's risk policy aims to identify and analyse the risks confronting the group, establish suitable risk limits and controls, and monitor compliance with the limits. Policy and systems for financial risk management are regularly assessed and, where necessary, adjusted to allow for changes in the market conditions and the Group's activities. Financial risk management is one element of the NS risk framework.

In order to ensure appropriate risk management, additional policies have been defined for a number of business units. For instance, NS Insurance, Abellio and NSFSC have specific risk controls reflecting the nature of their activities, unlike the other business units where Corporate Treasury determines the substance of the financial risk management.

The Group is involved through Abellio in transport franchises abroad (the United Kingdom and Germany). These operations are primarily in the United Kingdom, mainly on an independent basis or with minority shareholders, and in part through a joint venture with the partner Serco in which both partners have an equal share. Abellio’s financial risk management is part of the Abellio risk framework and consequently the NS risk framework.

Market risks

Market risk is the risk that the Group's income and expenditure, or the value of investments in financial instruments, will be negatively affected by changes in market prices, such as commodity prices, currency exchange rates and interest rates. The management of market risk aims to keep the market risk position within acceptable limits with the best possible return on investment. Market risk comprises three types of risk: interest-rate risk, currency risk and price risk.

Interest-rate risk

The Group's policy is aimed at ensuring that at least 50% of the interest-rate risk on drawn loans is based on a fixed rate of interest. When determining the interest-rate risk on drawn loans, the Group can take account of the cash and cash equivalents available that can neutralise the interest-rate risk of loans at variable rates. The Group uses derivatives such as interest-rate swaps to limit the interest-rate risks.

Interest-rate risks are predominantly managed centrally. Regulations and defined limits apply to interest-rate positions held with regard to foreign units within the Group. No speculative positions are held.

Exposure to interest-rate risks

The interest-rate profile of the interest-bearing financial instruments is as follows.

Cash-flow interest-rate risk

The cash-flow interest-rate risk is the risk that future cash flows generated by a financial instrument with a variable interest rate will fluctuate as a consequence of movements in market rates.

A reasonably feasible change of 0.5% in the interest rate as of the reporting date would cause equity and the result to increase or decrease by the amounts stated below. This analysis assumes that all other variables, notably the exchange rates, remain constant.

Sensitivity of the post-tax profit/loss and equity to variable interest rates

As at 31 December 2017, the Group had no loans hedged using interest swaps.

In 2016, the Group concluded a number of forward starting interest swaps to hedge the interest-rate risk of future financing of rolling stock for a foreign franchise (cash-flow hedge accounting). The underlying value of the forward contracts was €130 million and the associated loans are expected to be arranged as of year-end 2018. As at 31 December 2017, the carrying amount of this instrument is €2 million negative.

Currency risk

The Group is exposed to currency risks on purchases, trading activities, cash and cash equivalents, drawn loans, other balance-sheet positions and off-balance sheet commitments denominated in currencies other than the euro. Because of its business activities, the Group mainly has currency positions in sterling (GBP) and Swiss francs (CHF).

The risk of fluctuations in exchange rates is hedged using forward exchange contracts, spot and/or forward purchases and sales and swaps, thereby hedging one or more of the risks to which the primary financial instruments are exposed. Purchases and sales, investment and financing commitments, and settling accounts with foreign railway companies mainly take place in the functional currencies of the Group's business units, namely euros (EUR) and pounds sterling (GBP).

The currency risk of participating interests denoted in a foreign currency (pounds sterling and Swiss francs) is not hedged. The currency risks relating to translation differences in both the underlying balance-sheet items and the value of the participating interests in the case of a functional currency other than the euro are only hedged if the Group expects to terminate the business activities. The currency results for the regular balance-sheet items in the value of the participating interest are recognised in equity through the statutory translation reserve. At the end of 2017 and 2016, no materially significant positions were held in currencies other than the functional currency of the business units concerned.

At the end of 2017, the Group entered into a number of forward contracts in order to hedge specific currency positions. The nominal value of the hedged positions as at the end of 2017 was €44 million (€30 million at year-end 2016). The fair value of these currency derivatives at the end of 2017 was €1 million (year-end 2016: €1 million).

Sensitivity analysis for foreign currencies

Given that no materially significant items in financial instruments were held in foreign currencies at the end of 2017 or the end of 2016, a change in the value of the euro with respect to a foreign currency at the year-end will not have any material effect on equity and profits over the reporting period.

Price risk for energy

Netherlands

The Group is affected by market fluctuations in the price of energy. In 2014, the Group signed a ten-year contract (2014-2024) with Eneco for the supply of ‘green’ traction electricity for the rolling stock fleet in the Netherlands. From 2015 onwards, 50% of the trains in the Netherlands ran on ‘green’ electricity and by the end of 2016 the Group’s traction was entirely green. The contract covers the following risks (in whole or in part):

• Price risk: the fees for the Programme for Responsibility and Guaranteed Origins are fixed for the entire contractual period. The contract offers the option of purchasing the requisite electricity for future years based on a hedging strategy, which limits the exposure to market prices.

• Credit risk: the credit risk is limited to the thresholds that depend on the credit rating. If the exposure (which allows for aspects such as the difference between market values and contract values of electricity covered using a hedging strategy) exceeds a certain threshold (that depends on the credit rating), the Group or Eneco must give the other party guarantees or provide cash collateral.

• Volume risk: the volume risk is limited because the volume for the previous year is given as the volume required in each new year. In addition to this, a range also applies in the year in question within which fluctuations in the volume consumed do not affect the price.

• Image risk: the contract provides for an evaluation in 2019 to assess whether the traction energy is sufficiently ‘green’ by then. Should this not be the case, which we neither expect nor want, then the Group is entitled to terminate the contract as of 2020.

The contract complies with the ‘own use’ criteria and is not classified as a derivative.

United Kingdom

Abellio has entered into fuel hedging contracts for a number of subsidiaries to partially hedge movements in fuel prices and the associated currency risks. To do that, monthly forward contracts are used for a proportion of its fuel costs for a future period (ranging from 2018 to 2020) in order to cover the risks relating to the fuel costs and the associated currency risks. The guarantees given with these hedging contracts are specified in note 31.

Sensitivity of commodity (fuel) derivatives

The sensitivity of the commodity derivatives with a carrying amount as at 31 December 2017 of €4 million (€6 million as at 31 December 2016) is as follows. A rise of €0.10 in the fuel price would cause a reduction in the negative value of the commodity derivatives of approximately €17 million (31 December 2014: €15 million) and equity would increase by €13 million (31 December 2016: €12 million). If the fuel price fell, an opposite effect would be seen.

Credit risk

Credit risk is the risk of financial loss by the Group if a customer or counterparty to a financial instrument does not meet its contractual obligations. Credit risks mainly arise from receivables from customers and from investments. There was no significant concentration of credit risks as at the balance-sheet date.

The carrying amount of the financial assets represents the maximum credit risk. For details of the credit risk regarding EUROFIMA, see note 31. The maximum exposure to credit risk at the reporting date was as follows.

Investments

The Group limits its credit risk in its investments by only investing with other parties that comply with the policy drawn up by the company. Regular checks are performed to see if the contractual parties still comply with the policy or whether further action is needed.

Given the creditworthiness of the counterparties, the Group expects that those counterparties will fulfil their obligations. No impairment losses were suffered on the investments, bonds and deposits in 2017 or 2016. Investments are in principle made in counterparties with a long-term credit rating of at least A- from Standard & Poor’s and a long-term credit rating of at least A3 from Moody’s, or in a number of Dutch municipalities. If a counterparty only has a single credit rating, it must satisfy the rating requirements stated above from Standard & Poor’s or Moody’s. Investments that no longer comply with this policy are either permissible as exceptions and monitored frequently or reduced (generally through normal progression), which may mean they persist for some time after the balance-sheet date. The Group’s foreign companies do not have significant long-term cash surpluses, unless this is the result of their normal business activities (monies received in advance).

Trade and other receivables

The Group's credit risk relating to trade and other receivables is mainly determined by the individual characteristics of the separate customers. The demographic features of the customer base, the risk of non-payment in the sector and the country in which the customers are active have less impact on the credit risk. About 9% (2016: 9%) of the Group’s revenues are from sales transactions with the Dutch Education Executive Agency (DUO).

As part of the credit policy used by the business units, the individual creditworthiness of each new customer is assessed before standard payment and delivery conditions are offered to the customer. In the case of contract renewals, figures from the business unit's own experience are also used in assessing the customer's creditworthiness. In the assessment of the credit risk, customers are divided into groups based on credit characteristics; these groups include government, companies, private individuals and customers with possible financial problems in the past. Deliveries to customers with a high risk profile are only made after approval by the Executive Board. Business has been conducted with the majority of customers for many years, with only occasional (non-material) losses having been incurred.

Liquidity risk

The liquidity risk is the risk that the Group will have difficulty meeting its obligations to settle financial liabilities using cash or other financial assets. The principles underlying liquidity risk management are that sufficient liquid assets must be retained, as far as possible, to be able to meet the current and future financial obligations in the short term, under both normal and difficult circumstances, without any unacceptable losses being sustained or the Group’s reputation being jeopardised. The risk that the Group cannot meet its financial obligations is limited as the Group has sufficient cash or assets that can be swiftly cashed in. The Group also has committed credit facilities including €200 million up to December 2019 and €100 million up to December 2020, plus a standing credit facility of €345 million available until May 2022.

At the end of 2017, the cash and cash equivalents (instruments that can be converted into cash in short order) comprised €1,131 million (2016: €1,434 million). The contractual financial obligations due within one year total €893 million (2016: €788 million).

The Group manages the cash and cash equivalents on the basis of regular liquidity forecasts using a bottom-up approach. On the basis of this forecast, financing limits are set for the business units that are clients of Corporate Treasury’s in-house bank. The bank monitors these limits and they cannot be exceeded unless authorisation has been obtained. This gives Corporate Treasury an early warning system. The liquidity forecast and the aforementioned financing limits let Corporate Treasury manage the cash and cash equivalents by lending and withdrawing funds.

The following table shows the contractual maturities of the financial liabilities, including the estimated interest payments. The sums are gross amounts and have not been converted to present values.

The above items have been netted off, because the contract requires the hedging transactions to be netted on settlement. When calculating the future cash flows, it is assumed that the future variable interest rates are the same as the last known variable interest rates.

As regards the risks relating to capital, the Group has an agreed dividend policy with the shareholder.

Insurance risks

In the course of its operational activities, the Group is exposed to risks that can be insured. Risks beyond the scope of the business units are managed by the subsidiary NS Insurance. This refers to the risk of losses due to collisions, fire, accident and liability. The maximum extent of these losses is calculated by external specialists once every three years, or more often if changed circumstances make this necessary. The subsidiary, NS Insurance, insures the above risks for the business units. It does not insure third parties. If the total claims burden in any year exceeds NS Insurance's own internal cover, the additional cover required is provided by reinsurance. The Group's loss claims are paid from the premium income and investment income of NS Insurance. If the total costs including the claims burden exceed the revenue, these costs are paid from the freely distributable reserve of NS Insurance (if this is sufficient).

NS Insurance uses stop-loss reinsurance contracts for reinsurance. MPL (maximum possible loss) studies are carried out regularly to determine limits for the insurance. Provided market conditions allow, NS Insurance only takes out reinsurance with parties that have at least an A- rating. If the rating drops below A-, it has the option of cancelling the reinsurance agreement. This has as yet never happened. The reinsurers of NS Insurance had ratings of at least A- as at the end of 2017.

NS Insurance is an insurance company and is supervised by De Nederlandsche Bank and the Netherlands Authority for the Financial Markets (AFM). Insurers must hold sufficient capital reserves to satisfy the minimum solvency requirement of Solvency II (SCR, the Solvency Capital Requirement). Insurers are also required to determine their own standard solvency requirement. NS Insurance has determined its standard solvency requirement in such a way that it will still be able to satisfy the SCR even if the stress scenario arises. Its standard solvency requirement is €46 million. NS Insurance meets this requirement comfortably. NS Insurance is fully consolidated in the Group figures.

Risks deriving from cross-border lease transactions

Up until 1998, the Group entered into cross-border lease transactions with the object of reducing financing costs. These cross-border leases relate only to rolling stock. Economic ownership remains with the Group, so the assets concerned are included in the balance sheet. The carrying amount of the rolling stock financed by cross-border leases was €73 million at year-end 2017 (2016: €81 million). The financing benefit from the cross-border leases has been deducted from the financing costs, spread over the terms of the transactions concerned in the income statement. Some of the positions involved in these leases are off-balance sheet positions. The currency risk in these contracts is hedged, exceptional unforeseen situations notwithstanding. The last cross-border lease transaction was completed at the start of 2018 and will be settled in the course of 2018.

Fair value

Fair value versus the carrying amount

The carrying amounts of the financial assets and liabilities recognised in the balance sheet do not differ materially from the fair values.

Valuation of investments included as financial assets

For bonds, the fair value is calculated using the available current market prices/closing prices.

Valuation of derivatives

When determining the value of interest swaps and currency derivatives, the Group uses valuation methods in which all the significant data required is derived from visible market data (Level 2).