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 monitoring of the Group’s risk management framework. The Risk & Audit Committee and the Supervisory Board make sure that the risk management framework is sufficient in view of the risks to which the Group is exposed. The Group’s Risk & Audit Committee is supported in its supervisory role by NS Audit and the Group’s Control & Expertise department. NS Audit provides additional assurance concerning the proper control of all the NS business processes by performing regular and occasional evaluations. The findings of NS Audit are reported to the Risk & 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 compared to other business unts, given the nature of the businesses, for which Corporate Treasury determines the substantive content of the financial risk management.

The Group is also involved through Abellio in transport concessions abroad. These activities are mainly in the UK, largely independent and with the remainder in a joint venture with the partner Serco in which the two parties have equal representation. Abellio also has companies in the Netherlands and in Germany. The financial risk management of Abellio is part of the Abellio risk framework and therewith part of 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 has the goal of keeping the market risk position within acceptable limits with the best possible return on investment. The market risk comprises three types of risk: interest rate risks, currency risks and price risks.

Interest rate risk

The Group's policy is aimed at ensuring that at least 50% of the interest rate risk on loans taken out is based on a fixed rate of interest. When determining the interest rate risk on the loans taken out, the Group can take account of the available liquidity 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. Retaining interest rate positions relating to foreign parts of the concern is subject to regulations and the positions adopted are restricted to defined limits. 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 of 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 could mean that the equity and the result could increase or decrease by the amounts stated below. This analysis assumes that all other variables, particularly the exchange rates, remain constant.

Interest rate sensitivity of the result/equity after tax to variable rates

As at the reporting date, the percentage of loans with variable rates after hedging using interest rate swaps was 47% of the overall portfolio. The term of the interest rate swap is equal to the term of the loan. The hedging of the interest rate risk using cash flow hedge accounting is as follows:

In 2016, the Group has entered into a forward contract to hedge the interest rate risk on future financing of equipment on behalf of a foreign concession (cash flow hedge accounting). The underlying value of the forward contract amounts to €126 million. The book value of this instrument as at December 31, 2016 is €3 million.

Fair value interest rate risk

The interest rate risk for part of the financial fixed assets available for sale is hedged by means of a fair value hedge making use of interest rate swaps. These interest rate swaps had a nominal value of €60 million at the end of 2016 (2015: €60 million). The book value of these derivatives was nihil at the end of 2016 (2015: €0.5 million).

Currency risk

The Group is exposed to currency risks on purchases, trading activities, liquid assets, loans taken out, other balance-sheet positions and liabilities not included in the balance sheet denominated in currencies other than the euro. Because of its business activities, the Group mainly has currency positions in sterling (GBP), Norwegian krone (NOK) and Swiss francs (CHF).

The risk of fluctuations in exchange rates is hedged using forward exchange contract, spot and forward purchases and sales and swaps, thereby hedging one or more of the risks to which the primary financial instruments are exposed. Buying and selling, investment and financing commitments, and settling accounts with foreign railway companies that are denominated in a currency other than the functional currency of the Group's business units take place in euros (EUR) and pounds sterling (GBP).

Only if the Group expects to end the operations, currency risks relating to the translation differences of both the underlying balance sheet items, and participation value, where the functional currency differ from the Euro, are capped. The currency risk of these regular balance sheet items and participation value by means of the legal translation reserve recognized in equity.

At year end of 2016 and 2015, no material items were held in other than the functional currency of the relevant business.

At the end of 2016, the Group entered into a number of forward contracts in order to cover specific currency positions. The nominal position of the hedged positions amount at the end of 2016 €30 million. (end of 2015: €125 million). The fair value of these currency derivatives at the end of 2016 was €1 million (year-end 2015: €1 million).

Sensitivity analysis for foreign currencies

Given that no materially significant items of financial instruments held in foreign currencies were held at the end of 2016 or the end of 2015, a change in the value of the euro with respect to a foreign currency at the yearend will not have any material effect on the equity and the 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 will be running on renewable ‘green’ electricity, and by 2017 the Group’s traction will be entirely green. The contract covers the following risks (entirely or in part) as follows:

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

• Credit risk: the credit risk is limited to the thresholds that depend on the credit rating. If the so-called exposure (which allows for aspects such as the difference between market values and contract values of electricity covered using a hedging strategy) turns out to be above a certain threshold (that depends on the credit rating), the Group or Eneco does then have to 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. Within the year in question, in addition to the above, there is also a bandwidth for the volume within which a greater or smaller consumption figure does 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 cover 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 January 2016 to March 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 included in note 29.

Sensitivity of commodity (fuel) derivatives

The sensitivity of the commodity derivatives with a book value as at 31 December 2016 of €6 million (€41 million on 31 December 2015) 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 €15 million (31 December 2015: €19 million) and equity would increase by €12 million (31 December 2015: €15 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 book value of the financial assets represents the maximum credit risk. For details of the credit risk regarding Eurofima, please refer to note 29. 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. There are regular checks to see if the contractual parties still comply with the policy or whether further actions are 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 2016 or 2015. Investments are in principle made with 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 with a number of Dutch municipalities. If a counterparty only has a single credit rating, it must fulfil 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% (2015: 9%) of the Group’s revenues are realised through 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 extensions, 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, including 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.

The Group has formed a provision for impairment for the amount of the estimated losses from trade and other receivables. The most important elements of this provision are a specific loss provision for significant individual positions and a group loss provision for groups of comparable assets concerning losses that have been incurred but not yet identified. The group loss provision is determined on the basis of historic payment data for comparable financial assets.

The ageing of trade receivables as at the reporting date was as follows:

Impairment losses

The movement in the provision for impairments of trade receivables during the year was as follows:

Provisions relating to debtors are made in the case of an impairment, unless the Group is certain that it will not be possible to recover the sum owed. In that case, the amount is considered irrecoverable and is written off directly against the financial asset.

Liquidity risk

The liquidity risk is the risk that the Group will have difficulty meeting its financial obligations that need to be settled 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 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. In addition, the Group has a committed credit facility at its disposal through which €345 million can be withdrawn and with a term up to 2021, as well as a project credit facility for a sum of €426 million.

At the end of 2016, the cash and cash equivalents (that is, resources that can quickly be made liquid) comprised €1,434 million (2015: €1,600 million). The contractual financial liabilities due within one year are €788 million (2015: €1,197 million).

The Group manages the cash and cash equivalents on the basis of regular cash forecasts using a bottom-up approach. On the basis of this forecast, financing limits are set for the business units that are clients of the In-House Bank of Corporate Treasury. The bank monitors these limits and they cannot be exceeded unless authorisation has been obtained. This gives Corporate Treasury an early warning system. The cash forecast, together with the financing limits mentioned above, enables Corporate Treasury to 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 identical to 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

As part of the operational activities, the Group is exposed to risks against which insurance can be taken out. Risks beyond the scope of the business units are managed by the subsidiary NS Insurance. This refers to the risk of claims due to collisions, fire, accident and liability. The maximum size of these claims are 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 claim 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 claim costs are higher than revenues, these costs are paid from the freely distributable reserve of NS Insurance, if this is sufficient.

NS Insurance is reinsured by means of stop-loss reinsurance contracts. MPL (maximum possible loss) studies are carried out regularly to determine the insured limits. Provided market conditions allow, NS Insurance only takes out reinsurance with parties that have at least an A- rating and a stable outlook. 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 have ratings of at least A- as at the end of 2016.

NS Insurance is an insurance company that is supervised by De Nederlandsche Bank and the Netherlands Authority for the Financial Markets (AFM). Insurers must maintain a minimum equity of the solvency requirement of Solvency II (SCR or Solvency Capital Requirement). Insurers are expected to define their own standard solvency. NS Insurance has adopted her normsolvency as such that upon the occurrence of the stressscenario stillto meet the SCR. The standard solvency amounts to € 41 million. NS Insurance complies generously. NS Insurance is 100% consolidated within the Group.

Risks deriving from so-called ‘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 on the balance sheet. The book value of rolling stock financed by cross-border leases was €102 million at year-end 2016 (2015: €112 million). The financial 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. A sum of €8 million has been provided for the financial risks deriving from dissolution of cross-border lease transactions. Measured against the realistic risk, the Group believes the that provision amount to be sufficient. A proportion of the positions involved in these leases are off balance sheet positions. The currency risk in these contracts is covered, unforeseen risks notwithstanding.

Fair value

Fair value versus book value

The book values of the financial assets and liabilities recognised in the balance sheet are materially the same as the fair values.

Determining the value of investments included under the 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 rate swaps and currency derivatives, the Group uses valuation methods in which all the significant items of information required are derived from visible market data (Level 2).

The valuation of the HTM option for 2015 (see note 15) is based on data that is in turn based on market data that is not observable (non-observable input, Level 3).