Mercedes 2004 Annual Report Download - page 45

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in the start of the system with full functionality, which is scheduled
for January 1, 2006. Additional information on the electronic toll
collection system and the related risks can be found in the Notes
to the consolidated financial statements: Note 3 (Significant
Equity Method Investments), Note 31 (Legal Proceedings) and
Note 32 (Contingent Obligations and Commercial Commitments).
DaimlerChrysler bears a proportionate share of the risks of
its subsidiaries and its associated and affiliated companies in
line with its share of their equity capital.
Foreign exchange rate, interest rate, equity price
and commodity price risk
The DaimlerChrysler Group is exposed to market risks from
changes in foreign currency exchange rates, interest rates and
equity prices. Furthermore, commodity price risks arise from
procurement. These market risks may adversely affect Daimler-
Chrysler’s operating results and financial condition. The Group
seeks to manage and control these risks primarily through its
regular operating and financing activities, and if appropriate,
through the use of derivative financial instruments. Additional
information on financial instruments and derivatives can be
found in Notes 33 to the consolidated financial statements.
DaimlerChrysler evaluates these market risks by monitoring
changes in key economic indicators and market information on
an ongoing basis.
To quantify the exchange rate risk, interest rate risk and equity
price risk of the Group on a continuous basis, DaimlerChrysler’s
risk management systems employ value-at-risk analyses as rec-
ommended by the Bank for International Settlements. The value-
at-risk calculations employed by DaimlerChrysler express potential
losses in fair values assuming a 99% confidence level and a hold-
ing period of five days. This method is based on the variance-
covariance approach of the RiskMetrics™ model. Estimates of
volatilities and correlations are drawn from the RiskMetrics™
datasets and supplemented by additional exchange rate, interest
rate and equity price information. The Group does not use deri-
vative financial instruments for speculative purposes.
Any market sensitive instruments, including equity and fixed
interest bearing securities, that DaimlerChrysler holds for
pension plans or similar obligations are not included in this
quantitative and qualitative analysis. Please refer to Note 25a to
the Group’s consolidated financial statements for additional
information regarding the Group’s pension plans.
In accordance with the organizational standards in the international
banking industry, DaimlerChrysler maintains risk management con-
trol systems independent of corporate treasury and with a separate
reporting line.
Management of exchange rate risks. The global nature of
DaimlerChrysler’s business activities results in cash receipts and
payments denominated in various currencies. Cash inflows and
outflows of the business segments are offset and netted if they are
denominated in the same currency. Within the framework of central
currency management, currency exposures are regularly assessed
and hedged with suitable financial instruments, predominantly
foreign exchange forwards and currency options, according to
exchange rate expectations, which are constantly reviewed. The net
assets of the Group which are invested in subsidiaries and affiliated
companies outside the euro zone are generally not hedged against
currency risks. However, in specific circumstances, DaimlerChrysler
hedges the currency risk inherent in certain of its long-term invest-
ments. Besides this, DaimlerChrysler does in general not hedge the
currency translation risk which arises from our subsidiaries who
report their revenues and results in a functional currency other than
euro.