BMW 2007 Annual Report Download - page 127

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The cash flows shown comprise principal re-
payments and the related interest. The amounts
disclosed for interest rate and currency derivative
instruments include all cash flows relating to deriva-
tives that have a negative fair value at the balance
sheet date as well as all cash flows relating to deriva-
tives that have a positive fair value at the balance
sheet date but which are part of a hedging relation-
ship with a financial liability.
Solvency is assured at all times by managing
and monitoring the liquidity situation on the basis of
a rolling cash flow forecast. The resulting funding
requirements are secured by a variety of instruments
placed on the world’s financial markets. The objec-
tive is to minimise risk by matching maturities for the
Group’s financing requirements within the framework
of the target debt ratio. The long-term ratings pub-
lished by Standard & Poor’s (A+) and Moody’s (A1)
enable the BMW Group to obtain financing on com-
petitive terms and conditions.
Short-term liquidity is managed primarily by is-
suing money market instruments (commercial paper).
As a result of its good credit standing, reflected in
the first-class short-term ratings issued by Moody’s
(P-1) and Standard & Poor’s (A-1), the BMW Group is
also able to obtain competitive terms and conditions
in this area.
Also reducing liquidity risk, additional secured
and unsecured lines of credit are in place with first-
class international banks. Intragroup cash flow
fluctuations are evened out by the use of daily cash
pooling arrangements.
Market risks
The principal market risks to which the BMW Group
is exposed are currency risk and interest rate risk.
Protection against such risks is provided in the
first instance through natural hedging which arises
when the values of non-derivative financial instruments
have matching maturities and amounts (netting).
Derivative financial instruments are used to reduce
the risk remaining after netting. Derivative financial
instruments are only used to hedge underlying posi-
tions or forecast transactions.
The scope of permitted transactions, responsi-
bilities, financial reporting procedures and control
mechanisms used for financial instruments are set
out in detailed internal guidelines. This includes,
above all, a clear separation of duties between trading
and processing. Currency and interest rate risks are
managed at a corporate level.
Further disclosures relating to risk management
are provided in the Group Management Report.
Currency risk
As an enterprise with worldwide operations, business
is conducted in a variety of currencies, from which
currency risks arise. Since a significant portion of
Group revenues are generated outside the euro cur-
rency region and the procurement of production
material and funding is also organised on a worldwide
basis, currency risk is an extremely important factor
for Group earnings.
At 31 December 2007, derivative financial instru-
ments were in place to hedge exchange rate risks, in
particular for the currencies US dollar, British pound,
Canadian dollar and Japanese yen. The hedging
contracts comprise mainly option and forward cur-
rency contracts.
A description of how currency risk is managed is
provided in the Group Management Report on page
63. The BMW Group measures currency risks using
a cash-flow-at-risk model.
The starting point for analysing currency risk with
this model is the identification of forecast foreign
currency transactions or exposures. At the balance
sheet date, exposures for the coming year were as
follows:
in euro million 31.12. 2007 31.12. 2006
Euro/US dollar 6,140 5,787
Euro/British pound 3,484 3,331
Euro/Japanese yen 1,263 1,552