The objective of financial risk management is optimal capital procurement as well as liquidity position oriented towards payment obligations. Liquidity assurance is provided through long-term, staggered bonds. In addition, an ongoing credit facility exists through 2010, made available through a bank syndicate. An optimal liquidity position results from cash pooling. For selected activities in the treasury area Sika relies on additional third-party services.

Management of financial risks

The Group’s activities expose it to a variety of financial risks: Market risks (primirily foreign exchange risks, interest rate risks and price risks), credit risks and liquidity risks. The Group’s financial risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance.The Corporate Finance Department identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units.

Foreign exchange risks

The Group operates internationally and is exposed to foreign exchange risk arising from various currencyposures, primarily with respect to the Euro and the US Dollar. Foreign exchange risk arises when commercial transactions, recognized assets or liabilities and net investments in foreign opersations are denominated in a currency that is not the entity’s functional currency. The Groups makes every effort ot offset the impact of exchange rate movements as far as possible by utilizing natural hedges. Foreign exchange forward contracts/swaps are the main instrument used to hedge foreign exchange risks.

Gains and losses on foreign exchange hedges and assets or liabilities carried at fair value are recognized through profit or loss. The Group does not apply hedge accounting.

Sika carries out a sensitivity analysis for the dominant foreign currencies Euro and US Dollar. The assumed possible currency fluctuations are based on historical oberservations and future prognoses. Incorporated into calculations are financial instruments, Group – internal financing and foreign currency hedge transactions in the corresponding currencies.

Price Risks

The Group is exposed to purchasing price risks because cost of materials represents one of the Group’s largest cost factors. Purchasing prices are influenced far more by the interplay between supply and demand, the general economic environment and intermittent disruptions of processing and logistics chains, ranging from crude oil to purchased merchandise, than by crude oil prices themselves. Sika limits market price risks for important products by means of maintaining corresponding inventories and group contracts (lead buying). The most important raw materials are polymers such as polyurethane, epoxy resins, polyvinyl chloride and cementious basic materials.

Interest Rate Risk

Interest rate risks result from changes in interest rates, which could have a negative impact on the Group’s financial position, cash low and earnings situation. Interest rate risk is limited through emission of fixed interest long-term bonds. A change in the rate of interest would therefore alter neither annual financial expenses nor shareholders’ equity materially. Local bank loans and mortgages are insignificant. Interest rate development is closely monitored by management.

Credit Risk

Credit risks arise from the possibility that the counterparty to a transaction may not be able or willing to discharge its obligations, thereby causing the Group to suffer a financial loss. Counterparty risks are minimized by only concluding contracts with reputable business partners and banks. In addition, receivable balances are monitoresd on an ongoing basis via internal reporting procedures. Potentialk concentrations of risks are reduced by the large number of customers and their geographic dispersion. No customer represents more than 1.55 of the Group’s net sales.

Liquidity Risk

Prudent liquidity risk management includes maintaining sufficient cash and cash equivalents, the availability of funding from an adequate amount of committed credit facilities. Management monitors the Group’s liquidity reserve on the basis of expected cash flow.