Mercedes 2003 Annual Report Download - page 166
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Please find page 166 of the 2003 Mercedes annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Financial Reporting | Overview | Analysis of the Financial Situation | Statement by the Board of Management | Independent Auditors’ Report | Financial Statements
Interest Rate and Equity Price Risk Management. Daimler-
Chrysler holds a variety of interest rate sensitive assets and liabili-
ties to manage the liquidity and cash needs of its day-to-day opera-
tions. In addition a substantial volume of interest rate sensitive
assets and liabilities is related to the leasing and sales financing
business which is operated by DaimlerChrysler Services. In partic-
ular, the Group’s leasing and sales financing business enters into
transactions with customers, primarily resulting in fixed rate
receivables. DaimlerChrysler’s general policy is to match funding in
terms of maturities and interest rates. However, for a limited por-
tion of the receivables portfolio funding does not match in terms of
maturities and interest rates. As a result, DaimlerChrysler is
exposed to risks due to changes in interest rates. DaimlerChrysler
coordinates funding activities of the industrial business and finan-
cial services on the Group level. The Group uses interest rate deriv-
ative instruments such as interest rate swaps, forward rate agree-
ments, swaptions, caps and floors to achieve the desired interest
rate maturities and asset/liability structures.
The Group assesses interest rate risk by continually identifying
and monitoring changes in interest rate exposures that may
adversely impact expected future cash flows and by evaluating
hedging opportunities. The Group maintains risk management con-
trol systems independent of Corporate Treasury to monitor interest
rate risk attributable to DaimlerChrysler’s outstanding interest rate
exposures as well as its offsetting hedge positions. The risk man-
agement control systems involve the use of analytical techniques,
including value-at-risk analyses, to estimate the expected impact of
changes in interest rates on the Group’s future cash flows.
DaimlerChrysler also holds, to a minor extent, investments in
equity securities. The corresponding market risk and the risk of
derivative financial hedging instruments for equities is and was not
material to the Group in the displayed reporting periods.
Information with Respect to Fair Value Hedges. Gains and loss-
es in fair value of recognized assets and liabilities and firm commit-
ments of operating transactions as well as gains and losses on
derivative financial instruments designated as fair value hedges of
these recognized assets and liabilities and firm commitments are
recognized currently in revenues or cost of sales, as the trans-
actions being hedged involve sales or production of the Group’s
products. Net gains and losses in fair value of both recognized
financial assets and liabilities and derivative financial instruments
designated as fair value hedges of these financial assets and liabili-
ties are recognized currently in financial income, net.
For the year ended December 31, 2003, net losses of €57 million
(2002: net gains of €34 million) were recognized in operating and
financial income, net, representing principally the component of
the derivative instruments’ gain or loss excluded from the assess-
ment of hedge effectiveness and the amount of hedging ineffec-
tiveness.
Information with Respect to Cash Flow Hedges. Changes in the
value of forward foreign currency exchange contracts and currency
options designated and qualifying as cash flow hedges are report-
ed in accumulated other comprehensive income. These amounts
are subsequently reclassified into operating income, in the same
period as the underlying transactions affect operating income.
Changes in the fair value of derivative hedging instruments desig-
nated as hedges of variability of cash flows associated with vari-
able-rate long-term debt are also reported in accumulated other
comprehensive income. These amounts are subsequently reclassi-
fied into financial income, net, as a yield adjustment in the same
period in which the related interest on the floating-rate debt obliga-
tions affect earnings.
For the year ended December 31, 2003, €11 million losses (2002:
no gains or losses), representing principally the component of the
derivative instruments’ gain/loss excluded from the assessment of
the hedge effectiveness and the amount of hedge ineffectiveness,
were recognized in operating and financial income, net.
For the year ended December 31, 2003 and 2002, no gains or
losses had to be reclassified from accumulated other comprehen-
sive income into earnings as a result of the discontinuance of cash
flow hedges.
It is anticipated that €889 million of net gains included in accu-
mulated other comprehensive income at December 31, 2003, will
be reclassified into earnings during the next year.
As of December 31, 2003, DaimlerChrysler held derivative finan-
cial instruments with a maximum maturity of 35 months to hedge
its exposure to the variability in future cash flows from foreign cur-
rency forecasted transactions.
Information with Respect to Hedges of the Net Investment in
a Foreign Operation. In specific circumstances, DaimlerChrysler
seeks to hedge the currency risk inherent in certain of its long-
term investments, where the functional currency is other than the
euro, through the use of derivative and non-derivative financial
instruments. For the year ended December 31, 2003, net gains of
€48 million (2002: €127 million) from hedging the Group’s net
investments in certain foreign operations were included in the
cumulative translation adjustment without affecting Daimler-
Chrysler’s net income (loss).