The nature of the Finnair Group's business operations exposes the company to foreign exchange, interest rate, credit and liquidity, and fuel price risks. The Group's policy is to limit the uncertainty caused by such risks on cash flow, financial performance and equity.

The management of financial risks is based on the risk management policy, which specifies the minimum and maximum levels permitted for each type of risk. Financial risk management is directed and supervised by the Financial Risk Steering Group. Practical implementation of financial policy and risk management have been centralised in the parent company's finance department.

In its management of foreign exchange, interest rate and jet fuel positions the company uses different derivative instruments, such as forward contracts, swaps and options. Derivatives are designated at inception as hedges for future cash flows (cash flow hedges), hedges for firm orders (hedges of the fair value of firm commitments) or as financial derivatives not qualifying for hedge accounting (economic hedges). In terms of the hedging of future cash flows (cash flow hedging), the Finnair Group implements, in accordance with IAS 39 hedge accounting principles, hedging of fixed rate foreign exchange loans, foreign exchange hedging of lease payments and aircraft purchases, and hedging of jet fuel price and foreign exchange risks. In addition, hedging of firm commitment is used for aircraft investments.

Fuel price risk in flight operations
Fuel price risk means the cash flow and financial performance uncertainty arising from fuel price fluctuations.

Finnair hedges against jet fuel price fluctuations using gasoil and jet fuel forward contracts and options. As the underlying asset of jet fuel derivatives, the Jet Fuel CIF Cargoes NWE index is used, because around 65% of Finnair's fuel purchase contracts are based on the benchmark price index for North and West Europe jet fuel deliveries.

Finnair applies the principle of time-diversification in its fuel hedging. The hedging horizon according to the financial policy is three years. Under the financial policy, hedging must be increased in each quarter of the year so that the hedge ratio for Finnair's Scheduled Passenger Traffic for the first six months is more than 60% and so that thereafter a lower hedge ratio applies for each period. By allocating the hedging, the fuel cost per period is not as low as the spot-based price when prices fall, but when spot prices rise the fuel cost rises more slowly.

In accounting fuel hedges are recognised in Finnair in two different ways. In terms of the fuel consumption of Finnair, the first approximately 40 percentage points per period are treated in accounting as cash flow hedging in accordance with IAS 39 hedge accounting principles. Changes in the fair valueof derivatives defined as cash-flow hedging in accordance with IAS 39 are posted directly to the fair value reserve included in equity. The change in fair value recognised in the equity hedging reserve is posted to income statement at the period time as the hedged transaction. Changes in the fair value of hedges outside hedge accounting - which do not fulfil IAS 39 hedge accounting criteria - are recognised in other operating expenses over the time of the derivative.

At the end of financial year, Scheduled Passenger Traffic had hedged 75% of its fuel purchases for the first six months of 2009 and 54% for the second half of the year. Leisure Traffic has hedged 60% of its fuel purchases for the remaining winter season and 40% of its purchases for the coming summer season. At the end of the financial year Leisure Traffic has no price clauses with tour operators similar to those agreed in previous years.

In the financial year 2008, fuel used in flight operations accounted for 24,6% compared to the Group's turnover. At the end of the financial year, the forecast for 2009 is over 22%. On the closing date, a ten per cent rise in the market price of jet fuel - excluding hedging activity calculated using Scheduled Passenger Traffic's forecasted flights for 2009 - increases annual fuel costs by an estimated 33 million euros. On the closing date - taking hedging into account a ten per cent rise in fuel lowers operating profit by around 14 million euros. Situation as at 31 December represents well mean of calendar year.

Foreign exchange risk
Foreign exchange risk means the cash flow and financial performance uncertainty arising from exchange rate fluctuations. The Finnair Group's foreign exchange risk arises mainly from fuel and aircraft purchases, aircraft leasing payments and foreign currency incomes.

The financial policy divides the foreign exchange position into two parts, a profit and loss position and an investment position. The profit and loss position consists of dollar-denominated fuel purchases and leasing payments, sales revenue in a number of different currencies, and also foreign exchange- denominated money market investments and loans. The investment position includes dollar-denominated aircraft investments.

Finnair applies the principle of time-diversification in its foreign exchange hedging. The hedging horizon according to the financial policy is two years. The hedge ratio of the foreign exchange position is determined as the reduction of the overall risk of the position using the value-at-risk method. Under the financial policy, hedges must be added to the profit and loss position in each half of the year so that the hedge ratio for the first six months is more than 60% and so that thereafter the hedge ratio declines for each period. In addition, Finnair hedges foreign exhange risk exceeding two years as far as hedging the currency risk of fuel is concerned (IAS 39 cash flow hedging).

The investment position includes all foreign exchange-denominated aircraft investments for which a binding procurement contract has been signed. According to the financial policy, at least half of the investments recognised in the balance sheet must be hedged after the signing of a firm order. New hedges in investment position will be made as IAS 39 fair value hedge of a firm commitment.

Around 68% of Group turnover is denominated in euros. The most important other foreign sales currencies are the Swedish crown, the Japanese yen, the Chinese yuan, the US dollar and the British pound.

Approximately one third of the Group's operating costs are denominated in foreign currencies. The most important purchasing currency is the US dollar, which accounts for approximately 27% of all operating costs. Significant dollar-denominated expense items are aircraft leasing payments and fuel costs. The largest investments, the acquisition of aircraft and their spare parts, also take place mainly in US dollars.

At the end of financial year, Scheduled Passenger Traffic had hedged 80% of its profit and loss items for the first six months of 2009 and 62% for the second half of the year. On the closing date a 10% strengthening of the dollar against the euro - without hedging - has a negative impact on the annual result of around 47 million euros. On the closing date - taking hedging into account - a 10% strengthening of the dollar weakens the result by around 12 million euros. In the above sensitivity estimates, the dollar risk includes also the Chinese yuan and the Hong Kong dollar, whose historical correlation with the dollar is high. Situation as at 31 December represents well mean of calendar year.

Interest rate risk
Interest rate risk means the cash flow and financial performance uncertainty arising from interest rate fluctuations.

In Finnair Group the interest rate risk is measured using the interest rate re fixing period. If necessary, interest rate derivatives are used to adjust the interest rate re-fixing period. According to the financial policy, the mandate for the investment portfolio's interest rate re-fixing period is 0-12 months and for interest-bearing liabilities 0-24 months. On the closing date the investment portfolio's interest rate re-fixing period was 2 months and for interest-bearing liabilities 5 months. On the closing date a one percentage point rise in interest rates increases the annual interest income of the investment portfolio about 3 million euros and the interest expenses of the loan portfolio by less than 2 million euros. Situation as at 31 December represents well mean of calendar year.

Credit risk
The Group is exposed to counterparty risk when investing its cash reserves and in using derivative instruments. The credit risk is managed by making contracts, within the framework of risk management policy of counterparty risk limits, only with financially sound domestic and foreign banks, financial institutions and brokers. Liquid assets are also invested in bonds and commercial paper issued by conservatively selected companyspecific within limits. This way risk towards single counterparties are not significant. Change in fair value of groups loans rise from changes in FX and interest, not from credit risk. Groups' maximum exposure to credit risk is other financial assets presented at Note 23, cash and cash equivalent presented in Note 24, and trade receivables presented in Note 22.

Liquidity risk
The goal of the Finnair Group is to maintain good liquidity. Liquidity is ensured by cash reserves, bank account limits, liquid money market investments and committed credit facilities. With respect to aircraft acquisitions, the company's policy is to secure financing, for example through committed loans, at a minimum of 6 months before delivery. Counterparties of groups' long term loans are solid financial institutions with good reputation.

The Group's liquid assets were 392 million euros at the end of financial year 2008. Finnair Plc has a domestic commercial paper programme of 100 million euros, which wasn't used on the closing date. In addition, Finnair has a 200 million euro committed credit facility, committed unused 50 million euros aircraft financing limit and a 60 million dollar credit facility. The 200 million euros credit facility includes a finance covenant based on adjusted gearing. The covenant level of adjusted gearing is 175%, while at the closing date the figure was 63.2%. The maximum level set by the Board of Directors is 140%.

Capital management
The aim of the Group's capital management is, with the aid of an optimum capital structure, to support business operations by ensuring normal operating conditions and to increase shareholder value with the best possible return being the goal. An optimum capital structure also ensures lower capital costs. The capital structure is influenced e.g. via dividend distribution and share issues. The Group can vary and adjust the level of dividends paid to shareholders or the amount of capital returned to them or the number of new shares issued, or can decide on sales of asset items in order to reduce debt. It is the aim the Finnair's dividend policy to pay on average at least one third of the earnings per share as dividend during an economic cycle.

The development of the Group's capital structure is monitored continuously using adjusted gearing. When calculating adjusted gearing, interest-bearing net debt is divided by the amount of shareholders' equity. Net debt includes interestbearing debt less interest-bearing receivables and cash and cash equivalents.The Group's adjusted gearing at the end of 2008 was 63.2% (35.1).