Mercedes 2015 Annual Report Download - page 255

262 E | CONSOLIDATED FINANCIAL STATEMENTS | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Finance market risks
The global nature of its businesses exposes Daimler to significant
market risks resulting from fluctuations in foreign currency
exchange rates and interest rates. In addition, the Group is
exposed to market risks in terms of commodity price risk
associated with its business operations, which the Group hedges
partially through derivative financial instruments. The Group
is also exposed to equity price risk in connection with its invest-
ments in listed companies (including Nissan, Renault, BAIC
Motor and Kamaz). If these market risks materialize, they will
adversely affect the Group’s profitability, liquidity and capital
resources and financial position.
Daimler manages market risks to minimize the impact of
fluctuations in foreign exchange rates, interest rates and com-
modity prices on the results of the Group and its segments.
The Group calculates its overall exposure to these market risks
to provide the basis for hedging decisions, which include
the selection of hedging instruments and the determination of
hedging volumes and the corresponding periods. Decisions
regarding the management of market risks resulting from fluctu-
ations in foreign exchange rates, interest rates (asset-/liability
management) and commodity prices are regularly made by the
relevant Daimler risk management committees.
As part of its risk management system, Daimler employs value
at risk. In performing these analyses, Daimler quantifies its
market risk exposure to changes in foreign currency exchange
rates and interest rates on a regular basis by predicting the
potential loss over a target time horizon (holding period) and
confidence level.
The value at risk calculations employed:
– express potential losses in fair values,
and
– assume a 99% confidence level and a holding period
of five days.
Daimler calculates the value at risk for exchange rate and
interest rate risk according to the variance-covariance
approach. The value at risk calculation method for commodity
hedging instruments is based on a Monte Carlo simulation.
When calculating the value at risk by using the variance-
covariance approach, Daimler first computes the current market
value of the Group’s financial instruments portfolio. Then
the sensitivity of the portfolio value to changes in the relevant
market risk factors, such as particular foreign currency exchange
rates or interest rates of specific maturities, is quantified.
Based on expected volatilities and correlations of these market
risk factors, which are obtained from the RiskMetrics™ data-
set, a statistical distribution of potential changes in the portfolio
value at the end of the holding period is computed. The loss
which is reached or exceeded with a probability of only 1% can
be derived from this calculation and represents the value at risk.
The Monte Carlo simulation uses random numbers to generate
possible changes in market risk factors consistent with current
market volatilities. The changes in market risk factors allow
the calculation of a possible change in the portfolio value over
the holding period. Running multiple iterations 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%.
Oriented towards the risk management standards of the
international banking industry, Daimler maintains its financial
controlling unit independent of operating Corporate Treasury
and with a separate reporting line.
Exchange rate risk
Transaction risk and currency risk management. 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 euro and the
US dollar, the Chinese renminbi, and the British pound.
In the operating vehicle business, 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 (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 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, the Group
is indirectly exposed to transaction risk from its equity-method
investments.
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 particular currency can be offset by costs in the same
currency, even if the revenue arises from a transaction indepen-
dent of that in which the costs are incurred. As a result,
only the net exposure is 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 partially 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 generally strives to
increase cash outflows in the same currencies in which the
Group has a net excess inflow.