Chrysler 2007 Annual Report Download - page 191

The trading flows exposed to changes in these exchange rates amounted in 2007 to about 72% of the total currency risk from
trading transactions. Other significant exposures regard the exchange rates EUR/CHF, EUR/TRY, USD/CAD, AUD/USD, GBP/USD and
USD/JPY. None of these exposures, taken individually, exceeded 5% of the Group’s total transaction exchange risk exposure in
2007. It is the Group’s policy to use derivative financial instruments to hedge a certain percentage, on average between 55% and
85%, of the trading transaction exchange risk exposure forecast for the coming 12 months (including such risk beyond that date
where it is believed to be appropriate in relation to the characteristics of the business) and to hedge completely the exposure
resulting from firm commitments.
■Group companies may find themselves with trade receivables or payables denominated in a currency different from the money of
account of the company itself. In addition, in a limited number of cases, it may be convenient from an economic point of view or it
may be required under local market conditions, for companies to obtain finance or use funds in a currency different from the
money of account. Changes in exchange rates may result in exchange gains or losses arising from these situations.
It is the Group’s policy to hedge fully, whenever possible, the exposure resulting from receivables, payables and securities
denominated in foreign currencies different from the company’s money of account.
■Certain of the Group’s subsidiaries are located in countries which are not members of the European monetary union, in particular
the United States, Canada, United Kingdom, Switzerland, Brazil, Poland, Turkey, India, China, Argentina and South Africa. As the
Group’s reference currency is the Euro, the income statements of those countries are converted into euros using the average
exchange rate for the period, and while revenues and margins are unchanged in local currency, changes in exchange rates may
lead to effects on the converted balances of revenues, costs and the result in Euros.
■The assets and liabilities of consolidated companies whose money of account is different from the euros may acquire converted
values in euros which differ as a function of the variations in exchange rates. The effects of these changes are recognised directly in
the item “Cumulative translation differences” included in stockholders’ equity (see Note 25).
The Group monitors its principal exposure to conversion exchange risk, although there was no specific hedging in this respect at
the balance sheet date.
There have been no substantial changes in 2007 in the nature or structure of exposure to currency risk or in the Group’s hedging
policies.
Sensitivity analysis
The potential loss in fair value of derivative financial instruments held by the Group at December 31, 2007 for managing exchange
risk (currency swaps/forward, currency options and interest rate and currency swaps), which would arise in the case of a
hypothetical, unfavourable and instantaneous change of 10% in the exchange rates of the major foreign currencies with the Euro,
amounts to approximately 580 million euros (460 million euros at December 31, 2006). The valuation model for currency options
assumes that market volatility at year end remains unchanged. Receivables, payables and future trade flows whose hedging
transactions have been analysed were not considered in this analysis. It is reasonable to assume that changes in exchange rates
will produce the opposite effect, of an equal or greater amount, on the underlying transactions that have been hedged.
The increase over the prior year is mainly due to the derivatives hedging the 1 billon euros bond issued by Fiat Finance North
America Inc.
Fiat Group Consolidated Financial Statements at December 31, 2007 - Notes190