Chrysler 2004 Annual Report Download - page 125

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Consolidated Financial Statements at December 31, 2004 – Notes to the Consolidated Financial Statements
■contracts for combined hedging of foreign exchange and interest rate risks of 783 million euros (848 million euros at December
31, 2003);
■equity swaps for 66 million euros (978 million euros at December 31, 2003, inclusive of the equity swap on General Motors stock
for 916 million euros);
■call options purchased on General Motors common stock for 1,240 million euros.
These transactions are not subject to risks that may derive from the non-fulfillment by the counterparties insofar as the contracts are
entered into with several primary national and international financial institutions. Approximately 52% of the contracts outstanding
at December 31, 2004 will expire during 2005 and the remainder in the period 2006-2022, of which 14% will expire after 2009. The
consolidated statement of operations includes the effects both of the contracts that expired in 2004 and the provisions for the
contracts outstanding at year-enf, as stated in the Accounting Policies.
Hedging activities using derivative financial instruments have not undergone significant changes during the year, either in types of
instruments or amounts outstanding.
The Group’s financial policy attaches particular importance to the management and control of financial risks that can significantly
impact profits. The Group has adopted a series of guidelines regarding the management of exchange rate and interest rate
exposure. The policy allows derivative financial instruments to be used only for managing exchange and interest rate risks connected
to balance sheet flows and assets and liabilities, and not for speculative purposes.
As in previous years, in 2004, foreign exchange risk management followed the aforementioned policy and maintained the character
of selective risk management. The reduction in exchange exposure, substantially originating from the positive balance between
exports and imports, was based on the expected trend in exchange rates and the need to hedge the exchange levels of reference
without completely foregoing the benefits deriving from a favorable trend in the rates. Again this year, the management of exchange
risks was based principally on a combination of currency options.
In 2004, the management of interest rate exposure also followed the aforementioned guidelines which state that derivative financial
instruments should be used to reach a fixed exposure level and minimize financing costs, and to ensure a correct matching of
financing and investments by the financial services companies.
The derivative financial instruments principally relate to foreign exchange forward contracts, currency swaps and currency options or,
as regards interest rate risks, interest rate swaps, forward rate agreements and options on interest rates, as well as interest rate and
currency swaps for the combined management of currency and interest rate risks.
A comparison of the carrying values and the fair values of derivative financial instruments by contract type is set forth below:
At 12/31/2004 At 12/31/2003
Carrying Fair Carrying Fair
(in millions of euros) value value Difference value value Difference
Foreign exchange risk management instruments 20 97 77 (3) 59 62
Interest rate risk management instruments 132 441 309 138 319 181
Foreign exchange and interest rate risk management instruments 187 192 5 174 176 2
Equity swaps and equity options (4)(4)–(1) 439 440
Total 335 726 391 308 993 685
The fair value of these derivative financial instruments was estimated based on year-end market prices for instruments with similar
characteristics and maturities.
The increase in the fair value of the transactions for the management of interest rate risk is essentially related to the reduction in euro
interest rates for medium term maturities.