Mercedes 2008 Annual Report Download - page 208

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The hedged position is determined by the amount of derivative
currency contracts held. The derivative financial instruments
used to cover foreign currency exposure are primarily forward
foreign exchange contracts and currency options. Daimler’s
guidelines call for a mixture of these instruments depending on
the view of market conditions. Value at risk is used to measure
the exchange rate risk inherent in these derivative financial
instruments.
The following table shows the period-end, high, low and average
value at risk figures for the 2008 and 2007 portfolio of these
derivative financial instruments. The average exposure has been
computed on an end-of-quarter basis. The offsetting transactions
underlying the derivative financial instruments are not included
in the following value at risk presentation.
The value at risk figures of the financial instruments used to
hedge exchange rate risks were higher in 2008 as a result of
increased exchange rate volatilities.
Effects of currency translation. For purposes of Daimler’s con-
solidated financial statements, the income and expenses and the
assets and liabilities of subsidiaries located outside the euro
zone are converted into euros. Therefore, period-to-period changes
in average exchange rates may cause translation effects that
have a significant impact on, for example, revenue, segment results
(earnings before interest and taxes – EBIT) and net profit or loss
of the Group. Unlike exchange rate transaction risk, exchange rate
translation risk does not affect future cash flows. The Group’s
equity position reflects changes in book values due to exchange
rates. Daimler does not hedge against exchange rate translation
risk.
In 2008, 2007 and 2006, currency effects negatively affected
our operating results.
Interest rate risk. Daimler uses a variety of interest rate sensitive
financial instruments to manage the liquidity and cash needs
of its day-to-day operations. A substantial volume of interest rate
sensitive assets and liabilities results from the leasing and sales
financing business which is operated by the Daimler Financial Ser-
vices segment. The Daimler Financial Services companies enter
into transactions with customers that primarily result in fixed-rate
receivables. Daimler’s general policy is to match funding in
terms of maturities and interest rates, where economically feasi-
ble. However, for a limited portion of the receivables portfolio,
the Group does not match funding in terms of maturities in order
to take advantage of market opportunities. As a result, Daimler
is exposed to risks due to changes in interest rates.
An asset-liability committee consisting of members of the Daimler
Financial Services segment, the Corporate Treasury department
and the Corporate Controlling department manages the interest
rate risk relating to Daimler’s leasing and financing activities
by setting targets for the interest rate risk position. The Treasury
Risk Management department and the local Daimler Financial
Services companies are jointly responsible for achieving these tar-
gets. As a separate function, the Daimler Financial Services
Global Portfolio Management department monitors target achieve-
ment on a monthly basis. In order to achieve the targeted inter-
est rate risk positions in terms of maturities and interest rate fix-
ing periods, Daimler also uses derivative financial instruments,
such as interest rate swaps, forward rate agreements, swaptions
and caps and floors. Daimler assesses its interest rate risk posi-
tion by comparing assets and liabilities for corresponding matu-
rities, including the impact of the relevant derivative financial
instruments.
2007
Average
LowHighPeriod-end
2008
AverageLowHighPeriod-end
572572 253 380 236 236 147 183
Exchange rate risk
(from derivative financial instruments)
in millions of €