Mercedes 2004 Annual Report Download - page 46

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The following table shows values-at-risk figures for DaimlerChrysler’s
2004 and 2003 portfolio of derivative financial instruments used
to hedge the underlying currency exposure. We have computed the
average exposure based on an end-of-quarter basis.
The average and period-end values-at-risk of derivative financial
instruments used to hedge exchange rate risk decreased in
2004, primarily as a result of lower foreign exchange rate volatili-
ties and the strengthening of the euro especially against the
US dollar. In addition, the values-at-risk decreased due to the
reduced foreign exchange derivatives’ volume.
Due to exchange rate fluctuations, especially of the US dollar
and other major currencies against the euro, DaimlerChrysler is
exposed to exchange rate risks and resultant transaction risks.
These transaction risks primarily affect the Mercedes Car Group
division, as a significant portion of its revenues are generated
in foreign currencies while most of its costs are incurred in euros.
The Commercial Vehicles Division is also exposed to such trans-
action risks, but only to a minor degree because of its worldwide
production network. Chrysler Group’s transaction risks are also
low, as most of its revenues and costs are generated in US
dollars.
The strengthening of the euro against nearly all major currencies
in which DaimlerChrysler conducts business imposed a heavier
burden on operating profit than in the previous year, despite
foreign exchange hedging activities. If the euro remains strong
for an extended period or further strengthens relative to the
other, for the Group crucial currencies, this could have an even
greater negative impact on the Group’s profitability and financial
situation in the year 2005 and beyond.
Management of interest rate risks. DaimlerChrysler holds a
variety of interest rate sensitive financial instruments to manage
its liquidity and the cash needs of the day-to-day operations. A
substantial volume of interest rate sensitive assets and liabilities
is related to the leasing and sales financing business operated
by DaimlerChrysler Services. The leasing and sales financing busi-
ness enters into transactions with customers which primarily
result in fixed-rate receivables. DaimlerChrysler’s general policy
is to match funding in terms of maturities and interest rates.
However, for a limited portion of the receivables portfolio, the
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 Financial Services at the Group level. It uses
interest rate derivative instruments, such as interest rate swaps,
forward rate agreements, swaptions, caps and floors, to
achieve the desired interest rate maturities and asset/liability
structures (asset and liability management).
The following table shows value-at-risk figures for DaimlerChrysler’s
2004 and 2003 portfolio of interest rate sensitive financial
instruments. We have computed the average exposure based on
an end-of-quarter basis.
In millions of €
Value-at-Risk
Average
for
2004
12.31.
2003
Average
for
2003
75 115 14873
12.31.
2004
Interest-rate-sensitive
financial instruments
In millions of €
Value-at-Risk
Average
for
2004
12.31.
2003
Average
for
2003
256 381 398148
12.31.
2004
Exchange rate sensitive derivate
financial instruments 1
1 Forward foreign exchange contracts, foreign exchange swap contracts, currency options.