Mercedes 2009 Annual Report Download - page 113

Management Report |Risk Report |109
Financial risks
Daimler is exposed to market risks from changes in foreign
currency exchange rates, interest rates, commodity prices and
share prices. Market risks may adversely affect Daimler’s finan-
cial posi
tion, cash flows and profitability. Daimler seeks to control
and manage these risks primarily through its regular operating
and financing activities and, if appropriate, through the use of
derivative financial instruments. As part of the risk manage-
ment process, Daimler regularly assesses these risks by consider-
ing changes in key economic indicators and market information.
Any market-sensitive instruments, including equity and interest-
bearing securities held in pension funds and other postretire-
ment pension plans, are not included in the following analysis.
Exchange rate risks. The Daimler Group’s global reach means
that its business operations and financial transactions are con-
nected with risks arising from fluctuations of foreign exchange
rates, especially of the US dollar and other important currencies
against the euro. An exchange rate risk arises in the operating
business primarily when revenue is generated in a different cur-
rency than the related costs (transaction risk). This applies in
particular to the Mercedes-Benz Cars division, as a major portion
of its revenue is generated in foreign currencies while most
of its production costs are incurred in euros. The Daimler Trucks
division is also exposed to such transaction risks, but only to
a minor degree because of its worldwide production network.
Currency exposures are gradually hedged with suitable financ-
ial instruments, predominantly foreign exchange forwards and
currency options, in accordance with exchange rate expecta-
tions, which are constantly reviewed. Exchange rate risks also
exist in connection with the translation into euros of the net
assets, revenues and expenses of the companies of the Group
outside the euro zone (translation risk); these risks are not
hedged.
Interest rate risks. Daimler holds a variety of interest rate sensi-
tive financial instruments to manage the cash requirements of
its business operations on a day-to-day basis. Most of these finan-
cial instruments are held in connection with the financial services
business of Daimler Financial Services, whose policy is generally
to match funding in terms of maturities and interest rates. How-
ever, 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 coordinated at
Group level. Derivative interest rate instruments such as interest
rate swaps and forward rate agreements are used to achieve
the desired interest rate maturities 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 hedg-
ing context. The remaining equity price risk was not material to
the Group in 2009 and 2008.
Commodity price risks. Associated with Daimler’s business
operations, the Group is exposed to changes in the prices of
commodities. We address 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 associated with the purchase of metals.
Liquidity risks. In the normal course of business, we make use
of bonds, commercial paper and securitized transactions as well
as bank credit in various currencies, primarily to refinance the
leasing and sales-financing business. A repeated negative devel-
opment of the capital markets could increase the Group’s financ-
ing costs and restrict its financial flexibility. More expensive refi-
nancing 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.