Chrysler 2013 Annual Report Download - page 233

232 Consolidated
Financial Statements
at 31 December 2013
Notes
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 targeted
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.
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 20.
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
result of that company. In 2013, the total trade flows exposed to currency risk amounted to the equivalent of 13% 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, companies belonging to the Luxury Brands operating
segment) and to sales and purchases in Euro made by Chrysler;
GBP, AUD, MXN, CHF, CNY, ARS and VEF in relation to sales in the UK, Australian, Mexican, Swiss, Chinese, Argentinian and Venezuelan
markets;
PLN and TRY, relating to manufacturing costs incurred in Poland and Turkey;
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 2013 made up approximately 90% 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 functional currency
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 functional currency. 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
functional currency.