Mercedes 2008 Annual Report Download - page 207

Consolidated Financial Statements |Notes to Consolidated Financial Statements |203
The Monte Carlo simulation uses random numbers to generate
possible changes in market risk factors over the holding period.
The changes in market risk factors indicate a possible change in
the portfolio value. Running multiple repetitions of this simulation
leads to a distribution of portfolio value changes. The value at
risk can be determined based on this distribution as the portfolio
value loss which is reached or exceeded with a probability of 1%.
In accordance with the risk management standards of the interna-
tional banking industry, Daimler maintains its financial controlling
system independent of Corporate Treasury and with a separate
reporting line.
Exchange rate risk. Transaction risk and currency risk manage-
ment. The global nature of Daimler’s businesses exposes the
cash flows and results related to the operating businesses to risks
arising from fluctuations in exchange rates. These risks primarily
relate to fluctuations between the US dollar and the euro.
In accordance with its internal guidelines, Daimler refinances
receivables denominated in foreign currencies, which relate to
the Group’s invested liquidity, in the same foreign currencies.
As a result, the Group is not exposed to significant exchange rate
risks.
Payables in foreign currencies that result from the Group’s refi-
nancing are generally hedged against currency risks at the
time of the refinancing. The Group uses appropriate derivative
financial instruments to hedge against currency risk.
In the operating vehicle businesses, the Group’s exchange rate
risk primarily arises when revenue is generated in a currency that
is different from the currency in which the costs of generating
the revenue are incurred (so-called transaction risk). When the
revenue is converted into the currency in which the costs are
incurred, it may be inadequate to cover the costs if the value of
the currency in which the revenue is generated declined in the
interim relative to the value of the currency in which the costs were
incurred. This risk exposure primarily affects the Mercedes-
Benz Cars segment, which generates a major portion of its revenue
in foreign currencies and incurs manufacturing costs primarily
in euros. The Daimler Trucks segment is also subject to transaction
risk, but to a lesser extent because of its global production net-
work. The Mercedes-Benz Vans segment and the Daimler Buses
unit included in Vans, Buses, Other are also directly exposed
to transaction risk, but only to a minor degree compared to the
Mercedes-Benz Cars and Daimler Trucks segments. In addition,
through its proportionate share in the results of its equity invest-
ment in EADS, Vans, Buses, Other is indirectly exposed to trans-
action risk.
Cash inflows and outflows of the business segments are offset if
they are denominated in the same currency. This means that the
exchange rate risk resulting from revenue generated in a particu-
lar currency can be offset by costs in the same currency, even if
the revenue arises from a transaction independent of that in which
the costs are incurred. As a result, only the unmatched amounts
are subject to transaction risk. In addition, natural hedging oppor-
tunities exist to the extent that currency exposures of the oper-
ating businesses of individual segments offset each other at Group
level, thereby reducing overall currency exposure. These natural
hedges eliminate the need for hedging to the extent of the matched
exposures. To provide an additional natural hedge against any
remaining transaction risk exposure, Daimler strives, where appro-
priate, to increase cash outflows in the same currencies in
which the Group has a net excess inflow.
In order to mitigate the impact of currency exchange rate fluc-
tuations for the operating business (future transactions), Daimler
continually assesses its exposure to exchange rate risks and
hedges a portion of those risks by using derivative financial instru-
ments. Daimler’s Foreign Exchange Committee (FXCo) manages
the Group’s currency exposures and the use of currency deriva-
tives. The FXCo consists of the Chief Financial Officer and mem-
bers of the treasury department of the affected divisions as well
as members of Corporate Controlling. The Corporate Treasury
department assesses foreign currency exposures and carries
out the FXCo’s decisions concerning foreign currency hedging
through transactions with international financial institutions. Risk
Controlling regularly informs the Board of Management of the
actions taken by the Corporate Treasury department based on the
FXCo’s decisions.
The Group’s targeted hedge ratios for forecasted operating cash
flows in foreign currency are indicated by a reference model.
On the one hand, the hedging horizon is naturally limited by the
uncertainty related to cash flows that lie far in the future, and,
on the other hand, it may be limited by the fact that appropriate
currency contracts are not available. This reference model aims
to protect the Group from unfavorable movements in exchange
rates while preserving some flexibility to participate simultane-
ously in favorable developments. Based on this reference model
and depending on the market outlook, the FXCo determines the
hedging horizon, which usually varies from one to three years, as
well as the average hedge ratios. Reflecting the character of
the underlying risks, the hedge ratios decrease with increasing
maturities. At year-end 2008, the centralized foreign exchange
management showed an unhedged position in the automotive busi-
ness in calendar year 2009 amounting to 12% of the underlying
forecasted cash flows in US dollars. The corresponding figure
at year-end 2007 for calendar year 2008 was 30%. The lower
unhedged position compared to last year and a lower US dollar
volume in the operating business contributes to a lower exposure
of cash flows to currency risk with respect to the US dollar.
This also applies in part to the Group’s exposures to currency
risks with respect to other foreign currencies.