Chrysler 2015 Annual Report Download - page 235

2015 | ANNUAL REPORT 235
Financial market risks
Due to the nature of our business, the Group is exposed to a variety of market risks, including foreign currency
exchange rate risk, commodity price risk and interest rate risk.
The Group’s exposure to foreign currency exchange rate 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’s 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 in the price of certain raw materials and
energy 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.
These risks could significantly affect the Group’s financial position and results and for this reason, these risks are
systematically identified and monitored, in order to detect potential negative effects in advance and take the necessary
actions to mitigate them, primarily through its operating and financing activities and if required, 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 foreign currency
exchange rates and interest rates as well as commodities prices connected with future cash flows and assets and
liabilities, and not for speculative purposes.
The Group utilizes derivative financial instruments designated as fair value hedges mainly to hedge:
the foreign currency exchange rate risk on financial instruments denominated in foreign currency; and
the interest rate risk on fixed rate loans and borrowings.
The instruments used for these hedges are mainly foreign currency forward contracts, interest rate swaps and
combined interest rate and foreign 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 targeted mix of floating versus fixed rate funding structured loans; and
the price of certain commodities.
The foreign currency exchange rate exposure on forecasted commercial flows is hedged by foreign currency swaps
and forward contracts. 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 and commodity options. Counterparties to these agreements are major financial institutions.
Information on the fair value of derivative financial instruments held at the balance sheet date is provided in Note 17.