Mercedes 2006 Annual Report Download - page 87

Finance market risks
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 DaimlerChrysler’s
financial position, cash flow, and profitability. 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 Note 32 of
the Notes to the Consolidated Financial Statements. Daimler-
Chrysler evaluates these market risks by continually monitoring
changes in key economic indicators and market information.
To quantify the Group’s exchange rate risk, interest rate risk
and equity price risk on a continuous basis, DaimlerChrysler’s
risk management systems employ value-at-risk analyses
as recommended 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 holding 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 are supplemented by additional
information on exchange rates, interest rates and equity prices.
The DaimlerChrysler Group does not use derivative financial
instruments for speculative purposes.
Any market-sensitive instruments, including equity and fixed
interest bearing securities, that pension and other post-retirement
benefit plans hold are not included in this quantitative and
qualitative analysis. Please refer to Note 24a of the Notes to the
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 a financial
risk controlling system independent of Corporate Treasury.
Exchange rate risks. The global nature of DaimlerChrysler’s
business activities results in cash receipts and payments deno-
minated in various currencies. For the assessment of currency
exposures, the cash inflows and outflows of the business segments
are offset and netted out if they are denominated in the same
currency. Currency exposures are regularly assessed and gradually
hedged with suitable financial instruments, predomi
nantly 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 outside
the euro zone are generally not hedged against currency risks.
Besides this, DaimlerChrysler generally does not hedge the
currency translation risks that arise from our subsidiaries that
report their revenues and results in a functional currency
other than the euro.
The following table shows value-at-risk figures for DaimlerChrysler’s
2006 and 2005 portfolios 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 value at risk of our derivative financial instruments
used to hedge exchange rate risks in 2006 is comparable to that of
2005. The decrease in the period-end value at risk is primarily
a result of lower exchange-rate volatilities.
Management Report | Risk Report | 71
Value at risk
253281261208
Average
for 2005
Dec. 31,
2005
Average
for 2006
Dec. 31,
2006
Amounts in millions of €
Exchange-rate-sensitive
financial instruments1
1 Forward foreign exchange contracts, foreign exchange swap contracts, currency options.