Chrysler 2011 Annual Report Download - page 230

229
Consolidated
Financial Statements
at 31 December 2011
Counterparties to these agreements are major and diverse financial institutions.
Information on the fair value of derivative financial instruments held at the balance sheet date is provided in Note 21.
Quantitative information on currency risk
The Group is exposed to risk resulting from changes in exchange rates, which can affect its earnings and equity. In particular:
Where a Group company incurs costs in a currency different from that of its revenues, any change in exchange rates can affect the operating profit/(loss)
of that company. In 2011, the total trade flows exposed to currency risk amounted to the equivalent of 10% of the Group’s turnover.
The principal exchange rates to which the Group is exposed are the following:
USD/CAD, relating to sales in Canadian dollars made by Chrysler in Canada;
EUR/USD, relating to sales in US dollars made by Italian companies (in particular Ferrari and Maserati) to the North American market and to other
markets in which the US dollar is the trading currency;
EUR/GBP, EUR/CHF, USD/MXN, USD/VEF in relation to sales in the UK, Swiss, Mexican and Venezuelan markets;
EUR/PLN, EUR/TRY, relating to manufacturing costs incurred in Poland and Turkey for products sold in the Euro area;
USD/BRL, EUR/BRL, relating to Brazilian manufacturing operations and the related import and export flows.
Taken overall trade flows exposed to changes in these exchange rates in 2011 made up approximately 80% of the exposure to currency risk from trade
transactions.
It is the Group’s policy to use derivative financial instruments to hedge a certain percentage, on average between 55% and 85%, of the forecast trading
transaction exchange risk exposure 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,
Brazil, Canada, Poland, Turkey, Mexico, Argentina, the Czech Republic, India, China and South Africa. As the Group’s reference currency is the Euro,
the income statements of those entities 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 fluctuation in exchange rates. The effects of these changes are recognised directly in the item Cumulative Translation
Adjustments reserve, included in Other Comprehensive income (see Note 24).
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 2011 in the nature or structure of exposure to currency risk or in the Group’s hedging policies.
The potential loss in fair value of derivative financial instruments held for currency risk management (currency swaps/forwards, currency options, interest
rate and currency swaps) at 31 December 2011 resulting from a hypothetical, unfavourable and instantaneous change of 10% in the exchange rates of the
leading foreign currencies with the Euro would have been approximately €625 million (€457 million for Continuing Operations at 31 December 2010). The
increase is mainly due to the inclusion of Chrysler in the analysis.
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.