What it means
Currencies are given standard three-letter codes under an international standard called ISO 4217, so that traders, banks and accountants all use the same shorthand. For Norway the code is NOK, with the first two letters indicating the country and the third letter indicating the currency.
The central bank, Norges Bank, issues the krone and sets monetary policy. Norway is not a member of the European Union, and it does not use the euro.
This means that businesses selling goods to Norway, or buying from Norwegian suppliers, face exchange rate risk between their own currency and NOK. A firm invoicing in krone will receive more or fewer dollars depending on the rate on the day it is paid.
The krone is often described as being influenced by the oil and gas sector, because energy exports are a major part of the Norwegian economy. Commentators often watch oil prices as one input when thinking about the krone, although many other factors, such as interest rate differences and global risk appetite, also matter.
The currency is traded in smaller volumes than the dollar or euro, so exchange costs can be wider. Companies manage this exposure in several ways.
They may invoice in their own currency, hold krone accounts to pay local costs, or use forward contracts (agreements to exchange currency at a fixed rate on a future date). Finance teams also revalue krone balances at each reporting date and record the gains or losses.
When converting for reports or budgets, the key is to state the rate and the date. A rate quoted as NOK per dollar rises when the krone weakens, which is the opposite of how many people expect it to behave.
Being clear about which way the rate is expressed avoids costly misunderstandings. Interest rates matter too.
When Norwegian rates are higher than those in other countries, investors may hold krone to earn more interest, which can support the currency, though the effect varies over time. Businesses with Norwegian subsidiaries should also remember that translating krone profits into dollars at each reporting date can change the reported result even when local performance is unchanged.
In practice
Real-world examples.
Example
A software company sells a licence to a Norwegian customer and invoices in NOK. The finance team records the sale at the exchange rate on the invoice date. When the customer pays three months later, the rate has changed and the company books a small currency gain. The gain appears in the income statement as a foreign exchange item, separate from the sales revenue.
Example
An equipment manufacturer buys specialist parts from a Norwegian supplier priced in NOK. To avoid surprises, the treasurer buys a forward contract fixing the rate for the next six months. The budget for the parts is therefore certain in dollars. The cost of the forward contract is built into the price of the finished product.
Example
An investor holds a bond fund with some Norwegian government bonds. The bonds pay interest in NOK, so the dollar return depends on both the interest earned and the movement of the krone. The fund manager reports returns both with and without currency effects. This lets clients see how much of the result came from the investments and how much from the krone.
Formula
Calculation
Dollar value = amount in NOK / exchange rate (NOK per $1)
A Norwegian customer owes a US supplier NOK 5,000,000, and the rate is assumed to be 10 NOK per $1. Dollar value = 5,000,000 / 10 = $500,000. If the krone weakens to 11 NOK per $1 by the payment date, the same invoice is worth 5,000,000 / 11 = $454,545, a loss of about $45,455 for the supplier.Case study
Seen in the real world.
Stavanger Fjord Foods is a fictional exporter of seafood that sells to buyers in several countries and pays its costs in NOK. In this illustrative story, it invoiced a US customer $800,000 when the rate was 10 NOK per $1, meaning it expected 8,000,000 NOK to cover its local costs. By the time the customer paid, the krone had strengthened to 9 NOK per $1.
The dollar payment of $800,000 then converted to only 7,200,000 NOK, a shortfall of 800,000 NOK against what the company needed. The finance director decided to use forward contracts for large export invoices from then on. She also added a rule that every sales quote must state the currency and the rate used.
Following the episode, Stavanger set a policy of hedging between 50% and 80% of expected dollar receipts for the next six months. The policy gave the sales team a fixed budget rate for pricing and left some room to benefit if the krone moved in the company's favour.
Watch out
Common mistakes.
- Mixing up the direction of the rate. A higher figure of NOK per dollar means the krone is weaker, not stronger.
- Ignoring currency risk on invoices. A delay between invoice and payment exposes the company to rate movements.
- Using an old rate for reporting. Always state the rate and the date used for conversion.
Questions
People also ask.
What is NOK?
It is the ISO code for the Norwegian krone, the currency of Norway.
Does Norway use the euro?
No, Norway uses its own currency and is not a member of the eurozone.
How can companies reduce exposure to NOK?
They can invoice in their own currency, match NOK income with NOK costs, or use forward contracts to fix a future rate.
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