Mercedes 2009 Annual Report Download - page 242

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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
international 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 cash
flows and earnings to risks arising from fluctuations in exchange
rates. These risks primarily relate to fluctuations between
the US dollar as well as other important currencies 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 arise 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
euro. The Daimler Trucks segment is also subject to transaction
risk, but to a lesser extent because of its global production
network. The Mercedes-Benz Vans and Daimler Buses segments
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 investment in EADS, the Group is indirectly
exposed to transaction 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 par-
ticular 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
opportunities exist to the extent that currency exposures of the
operating 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 appropriate, to increase cash outflows in the same curren-
cies in which the Group has a net excess inflow.
In order to mitigate the impact of currency exchange rate fluctua-
tions 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 instruments.
Daimler’s Foreign Exchange Committee (FXCo) manages the Group’s
exchange rate risk and its hedging transactions through currency
derivatives. The FXCo consists of the Chief Financial Officer, the
head of the Investor Relations & Treasury department, the head
of the Corporate Controlling department and the heads of the Con-
trolling departments of the relevant segments. The Corporate
Treasury department assesses foreign currency exposures and
carries out the FXCo’s decisions concerning foreign currency
hedging through transactions with international financial institu-
tions. Risk Controlling regularly informs the Board of Manage-
ment of the actions taken by Corporate Treasury 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 2009, the centralized foreign exchange
management showed an unhedged position in the automotive busi-
ness in calendar year 2010 amounting to 30% of the underlying
forecasted cash flows in US dollars. The corresponding figure at
year-end 2008 for calendar year 2009 was 12%. The higher
unhedged position compared to last year contributes to a higher
exposure of cash flows to currency risk with respect to the
US dollar.
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.