Mercedes 2008 Annual Report Download - page 85

Management Report |Risk Report|81
Interest rate risks. The Group holds a variety of interest rate
sensitive financial instruments to manage the cash requirements
of its business operations on a day-to-day basis. Most of these
financial instruments are held in connection with the financial ser-
vices business of Daimler Financial Services, whose policy
is generally to match funding in terms of maturities and interest
rates. However, to a limited extent, the funding does not match
in terms of maturities and interest rates, which gives rise to the
risk of changes in interest rates. The funding activities of the
industrial business and the financial services business are coordi-
nated at Group level. Derivative interest rate instruments such
as interest rate swaps, forward rate agreements, swaptions, caps
and floors are used to achieve the desired interest rate maturi-
ties and asset/liability structures (asset and liability management).
Equity price risks. Daimler holds investments in equities and
equity derivatives. In accordance with international banking
standards, Daimler does not include equity investments that the
Group classifies as long-term investments in the equity price
risk assessment. Equity derivatives used to hedge the market price
of investments accounted for using the equity method are also
not included in the assessment of equity price risk due to the hed-
ging context. The remaining equity price risk was not material
to the Group in 2008 and 2007; the same applies to the present
situation.
Commodity price risks. Associated with Daimler’s business
operations, the Group is exposed to changes in the prices of com-
modities. Daimler addresses these procurement risks by means
of concerted commodity and supplier risk management. To a minor
extent, derivative commodity instruments are used to reduce
some of the Group’s commodity risks, primarily the risks associ-
ated with the purchase of precious metals.
Further information on financial market risks, risk-minimizing
actions and the management of those risks is provided in Note 30
of the Notes to the Consolidated Financial Instruments. Infor-
mation on financial instruments and on the Group’s pension plans
can be found in Note 29 and Note 21.
Liquidity risks
In the normal course of business, bonds, commercial paper and
securitized transactions as well as bank credit in various curren-
cies are applied, primarily to refinance the leasing and sales-
financing business. Daimler’s refinancing is currently only possible
at significantly higher costs, especially when large volumes are
involved. A sustained negative development of the capital markets
could increase the Group’s financing costs and restrict its fi-
nancial flexibility. More expensive refinancing would also have an
impact on the competitiveness and profitability of our financial
services business; a limitation of the financial services business
would have a negative effect on the automotive business.
Risks connected with pension plans
Daimler has pension obligations, and to a smaller extent obliga-
tions relating to healthcare and life-insurance benefits, which
are not completely covered by plan assets. The balance of obliga-
tions less plan assets constitutes the financing status for these
employee-benefit plans. Even small changes in the assumptions
used for the valuation of the benefit plans such a reduction in
the discount rate could lead to an increase in those obligations.
On the other hand, the market value of the plan assets is deter-
mined to a large degree by developments in the capital markets.
Unfavorable developments, in particular relating to equity prices
and fixed-interest securities, could negatively affect the market
value. Both higher obligations and reduced plan assets or a
combination of the two would have a negative impact on the
financing status of our benefit plans. Higher obligations and
lower yields from the plan assets could also increase the net
expenses relating to the benefit plans in the coming years.