Chrysler 2011 Annual Report Download - page 229

Consolidated
Financial
Statements
at 31 December
2011
Notes
228
From an operating point of view the Group manages liquidity risk by monitoring cash flows and keeping an adequate level of funds at its disposal. The
operating cash flows, main funding operations and liquidity of the Fiat Group excluding Chrysler are centrally managed in the Group’s treasury companies
with the aim of ensuring effective and efficient management of the Group’s funds. These companies obtain funds on the financial markets by means which
may assume different technical forms.
Chrysler manages the cash generated by its operations and coverage of its funding requirements independently. In this respect Fiat has pledged no
guarantee, commitment or similar obligation in relation to any of Chrysler’s financing obligations, nor has it assumed any kind of obligation or commitment
to fund Chrysler in the future.
Details of the repayment structure of the Group’s financial assets and liabilities are provided in Note 19 - Current Receivables and Other current assets and
in Note 28 - Debt. Details of the repayment structure of derivative financial instruments are provided in Note 21.
The Group believes that the funds currently available to the treasuries of Fiat and Chrysler, in addition to those that will be generated from operating and
financing activities, will enable the Fiat Group to satisfy the requirements of its investing activities and working capital needs, fulfil its obligations to repay its
debt at the natural due dates and ensure an appropriate level of operating and strategic flexibility.
Finance market risks
As a multinational group that has operations throughout the world, the Group is exposed to market risks from fluctuations in foreign currency exchange and
interest rates, in addition, the Group is exposed to market risks in terms of the commodity prices associated with business operations. The Group is also
exposed to the risk of a change in the price of certain shares.
The Group exposure to currency risk arises both in connection with the geographical distribution of the Group’s industrial activities compared to the markets
in which it sells its products, and in relation to the use of external borrowing denominated in foreign currencies.
The Group exposure to interest rate risk arises from the need to fund industrial and financial operating activities and the necessity to deploy surplus funds.
Changes in market interest rates may have the effect of either increasing or decreasing the Group’s net profit/(loss), thereby indirectly affecting the costs
and returns of financing and investing transactions.
The Group’s exposure to commodity price risk arises from the risk of changes occurring in the price of certain raw materials used in production. Changes
in the price of raw materials could have a significant effect on the Group’s results by indirectly affecting costs and product margins.
The Group regularly assesses its exposure to finance market risk and manages those risks through the use of derivative financial instruments in accordance
with its established risk management policies.
The Group’s policy permits derivatives to be used only for managing the exposure to fluctuations in exchange and interest rates connected with future cash
flows and assets and liabilities, and not for speculative purposes.
The Group utilises derivative financial instruments designated as fair value hedges, mainly to hedge:
the currency risk on financial instruments denominated in foreign currency;
the interest rate risk on fixed rate loans and borrowings.
The instruments used for these hedges are mainly currency swaps, and interest rate swaps and combined interest rate and currency financial instruments.
The Group uses derivative financial instruments as cash flow hedges for the purpose of pre-determining:
the exchange rate at which forecasted transactions denominated in foreign currencies will be accounted for;
the interest paid on borrowings, both to match the fixed interest received on loans (customer financing activity), and to achieve a pre-defined mix of
floating versus fixed rate funding structured loans;
the price of certain commodities.
The exchange rate exposure on forecasted commercial flows is hedged by currency swaps, forward contracts and currency options. Interest rate exposures
are usually hedged by interest rate swaps and, in limited cases, by forward rate agreements. Exposure to changes in the price of commodities is generally
hedged by using commodity swaps.