BMW 2010 Annual Report Download - page 129

127 GROUP FINANCIAL STATEMENTS
in euro million 31. 12. 2010 31. 12. 2009
Euro 4,290 5,514
US Dollar 7,429 6,628
British Pound 2,599 2,031
in euro million 31. 12. 2010 31. 12. 2009
Euro 11 47
US Dollar 27 139
British Pound 4 10
The BMW Group’s currency risk relates primarily to the
currencies shown.
Interest rate risk
The BMW Group’s financial management system involves
the use of standard financial instruments such as short-
term deposits, investments in variable and fixed-income
securities as well as securities funds. The BMW Group
istherefore exposed to risks resulting from changes in
interest rates.
Interest rate risks can be managed by the use of interest
rate derivatives. The interest rate contracts used for
hedging purposes comprise mainly swaps which are ac-
counted for on the basis of whether they are designated
as a fair value hedge or as a cash flow hedge. A description
of how interest rate risk is managed is provided in the
Group Management Report on page 67.
As stated there, the BMW Group applies a value-at-risk
approach for internal reporting purposes and to manage
interest rate risks. This is based on a variance-covariance
method, in which the potential future fair value losses
These risks arise when funds with differing fixed-rate
periods or differing terms are borrowed and invested. All
items subject to, or bearing, interest are exposed to inter-
est rate risk. Interest rate risks can affect either side of the
balance sheet.
The fair values of the Group’s interest rate portfolios for
the three principal currencies were as follows at the end
of the reporting period:
of the interest rate portfolios are compared across the
Group with expected amounts measured on the basis of
a holding period of ten days and a confidence level of
99%. Aggregation of these results creates a risk reduction
effect due to correlations between the various portfolios.
In the following table the potential volume of fair value
fluctuations – measured on the basis of the value-at-risk
approach – are compared with the expected value for
the interest rate relevant positions of the BMW Group for
the three principal currencies:
Other risks
The BMW Group is exposed to raw material price risks.
A description of how these risks are managed is provided
in the Group Management Report on page 64. In order
to reduce these risks, derivative financial instruments
are used that serve to hedge purchase price fluctuations
agreed with suppliers with respect to the raw material
content of purchases. Changes in the fair values of these
derivatives, which generally track the quoted market
prices of the raw material being hedged, gives rise to mar-
ket price risks for the Group.
If the market prices of hedged raw materials had been 10%
higher (lower) at 31 December 2010, the Group profit
before tax would have been euro 50 million higher (euro
50 million lower).
A further exposure relates to the residual value risk on
vehicles returned to the Group at the end of finance lease
contracts. The risks from financial instruments used in
this context were not material to the Group in the past
and at the end of the reporting period. A description of
how these risks are managed is provided in the Group
Management Report on page 67. Information regarding
the residual value risk from operating leases is provided
on pages 83 et seq.