Chrysler 2008 Annual Report Download - page 205

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 2008 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 31 December 2008 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 €687 million (€580 million at 31 December 2007). 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 increased hedging levels.
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 profit/(loss) 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 net profit/(loss).
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).
Fiat Group Consolidated Financial Statements at 31 December 2008204