Chrysler 2010 Annual Report Download - page 208

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The fair value of derivative financial instruments is determined by taking into consideration market parameters at the balance sheet date and using valuation
techniques widely accepted in the financial business environment. In particular:
the fair value of forward contracts and currency swaps is determined by taking the prevailing exchange rate and interest rates in the two currencies at the
balance sheet date;
the fair value of currency options is determined using valuation techniques based on the Black-Scholes model or binomial models and market parameters
at the balance sheet date (in particular exchange rates, interest rates and volatility rates);
the fair value of interest rate swaps and forward rate agreements is determined by using the discounted cash flow method;
the fair value of derivative financial instruments acquired to hedge interest rate risk and currency risk is determined using the exchange rates prevailing at
the balance sheet date and the discounted cash flow method;
the fair value of equity swaps is determined using market prices at the balance sheet date;
the fair value of derivatives hedging commodity price risk is determined by using the discounted cash flow method, taking the market parameters at the
balance sheet date (and in particular the future price of the underlying and interest rates).
The overall increase in Other financial assets, from €636 million at 31 December 2009 to €604 million at 31 December 2010 and in Other financial liabilities
from €464 million at 31 December 2009 to €402 million at 31 December 2010 is mostly due to the reclassification to Discontinued Operations and to
changes in exchange rates and interest rates during the year, and to a positive fair value arising from the equity swaps on Fiat S.p.A. ordinary shares
(€107 million euros).
As this item consists principally of hedging instruments, the change in their value is compensated by the change in the value of the hedged item.
Derivates for trading consist principally of the following types:
derivatives (mostly currency based derivatives) acquired to hedge receivables and payables subject to currency risk and/or interest rate risk which are not
formally designated as hedges at Group level;
derivatives relating to Fiat shares (equity swaps) which are described further below;
an embedded derivative in a bond issue in which the yield is determined as a function of trends in the inflation rate and related hedging derivative, which
converts the exposure to floating rate. The total value of the embedded derivative is offset by the value of the hedging derivative.
At 31 December 2010, the notional amount of outstanding derivative financial instruments is as follows:
At 31 December 2010 At 31 December 2009
Continuing Discontinued
(€ million) Operations Operations Total Total
Currency risk management 8,183 4,378 12,561 9,189
Interest rate risk management 9,407 3,133 12,540 13,368
Interest rate and currency risk management 1,005 - 1,005 933
Other derivative financial instruments 230 2 232 244
Total notional amount 18,825 7,513 26,338 23,734
At 31 December 2010, the notional amount of Other derivative instruments consists of:
For €204 million (€204 million at 31 December 2009) the notional amount of the two equity swaps, renewed in 2010 and expiring in 2011, arranged to
hedge the risk of an increase in the Fiat share price above the exercise price of the stock options granted to the Chief Executive Officer in 2004 and 2006
(see Note 23). At 31 December 2010, the equity swaps have a total positive fair value of €115 million (a positive fair value of €8 million at 31 December
2009). Although these equity swaps were entered into for hedging purposes, they do not qualify for hedge accounting under IFRS and accordingly are
defined as trading derivative financial instruments. Following the Demerger these equity swaps make reference to the performance of the stock market
value of the basket of shares made up of the Fiat S.p.A. share and the Fiat Industrial S.p.A. share.
For €14 million (€14 million at 31 December 2009), the notional amount of the derivative embedded in a bond with a return linked to inflation rates,
as well as the notional amount of the related hedging derivative, which converts the exposure to floating rate.