Chrysler 2007 Annual Report Download - page 192

Interest rate risk
The manufacturing companies and treasuries of the Group make use of external funds obtained in the form of financing and invest
in monetary and financial market instruments. In addition, Group companies make sales of receivables resulting from their trading
activities on a continuing basis. Changes in market interest rates can affect the cost of the various forms of financing, including the
sale of receivables, or the return on investments, and the employment of funds, causing an impact on the level of net financial
expenses incurred by the Group.
In addition, the financial services companies provide loans (mainly to customers and dealers), financing themselves using various
forms of direct debt or asset-backed financing (e.g. securitisation of receivables). Where the characteristics of the variability of the
interest rate applied to loans granted differ from those of the variability of the cost of the financing obtained, changes in the
current level of interest rates can influence the operating result of those companies and the Group as a whole.
In order to manage these risks, the Group uses interest rate derivative financial instruments, mainly interest rate swaps and
forward rate agreements, with the object of mitigating, under economically acceptable conditions, the potential variability of
interest rates on the net result.
Sensitivity analysis
In assessing the potential impact of changes in interest rates, the Group separates out fixed rate financial instruments (for which
the impact is assessed in terms of fair value) from floating rate financial instruments (for which the impact is assessed in terms of
cash flows).
The fixed rate financial instruments used by the Group consist principally of part of the portfolio of the financial services
companies (basically customer financing and financial leases) and part of debt (including subsidised loans and bonds).
The potential loss in fair value of fixed rate financial instruments (including the effect of interest rate derivative financial
instruments) held at December 31, 2007, resulting from a hypothetical, unfavourable and instantaneous change of 10% in market
interest rates, would have been approximately 86 million euros (105 million euros at December 31, 2006).
Floating rate financial instruments include principally cash and cash equivalents, loans provided by the financial services
companies to the sales network and part of debt. The effect of the sale of receivables is also considered in the sensitivity analysis
as well as the effect of hedging derivative instruments.
A hypothetical, unfavourable and instantaneous change of 10% in short-term interest rates at December 31, 2007, applied to
floating rate financial assets and liabilities, operations for the sale of receivables and derivatives financial instruments, would have
caused increased net expenses before taxes, on an annual basis, of approximately 9 million euros (11 million euros at December
31, 2006)
This analysis is based on the assumption that there is a general and instantaneous change of 10% in interest rates across
homogeneous categories. A homogeneous category is defined on the basis of the currency in which the financial assets and
liabilities are denominated.
Fiat Group Consolidated Financial Statements at December 31, 2007 - Notes 191