Mercedes 2015 Annual Report Download - page 256

E | CONSOLIDATED FINANCIAL STATEMENTS | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 263
In order to mitigate the impact of currency exchange rate
fluctuations 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 representatives of the relevant segments and central functions.
The Corporate Treasury department aggregates foreign cur-
rency exposures from Daimler’s subsidiaries and operative units
and carries out the FXCo’s decisions concerning foreign cur-
rency hedging through transactions with international financial
institutions. Risk Controlling regularly informs the Board of
Management 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 uncertainty related to cash flows that lie far in the future;
on the other hand, it may also be limited by the fact that appro-
priate currency contracts are not available. This reference
model aims to protect the Group from unfavorable movements
in exchange rates while preserving some flexibility to partici-
pate 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 five 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 2015, foreign exchange management
showed an unhedged position in the automotive business for the
underlying forecasted cash flows in US dollars in calendar
year 2016 of 20%, for the underlying forecasted cash flows
in Chinese renminbi in calendar year 2016 of 22%, as well
as for the underlying forecasted cash flows in British pounds
in calendar year 2016 of 29%.
The hedged position of the operating vehicle businesses
is influenced 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 assessment
of market conditions. Value at risk is used to measure
the exchange rate risk inherent in these derivative financial
instruments.
Table  E.83 shows the period-end, high, low and average
value at risk figures of the exchange rate risk for the 2015 and
2014 portfolios of derivative financial instruments, which
were entered into primarily in connection with the operative
vehicle businesses. Average exposure has been computed
on an end-of-quarter basis. The offsetting transactions under-
lying the derivative financial instruments are not included
in the following value at risk presentation. See also table  E.80
for the nominal volumes on the balance sheet date of deriv-
ative currency instruments entered into to hedge the currency
risk from forecasted transactions.
In 2015, the development of the value at risk from foreign
currency hedging was mainly driven by changes in the nominal
volume and by the increased foreign currency volatilities.
The Group’s investments in liquid assets or refinancing activities
generally are not allowed to result in currency risk. Transaction
risks arising from liquid assets or payables in foreign currencies
that result from the Group’s investment or refinancing on
money and capital markets are generally hedged against currency
risks at the time of investing or refinancing in accordance
with Daimler’s internal guidelines. The Group uses appropriate
derivative financial instruments (e.g. cross currency interest
rate swaps) to hedge against currency risk.
Since currency risks arising from the Group’s investment or
refinancing in foreign currencies and the respective hedging
transactions principally offset each other, these financial
instruments are not included in the value at risk calculation
presented.
Effects of currency translation. For purposes of Daimler’s
consolidated 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 trans-
lation effects that have a significant impact on, for example,
revenue, segment results (EBIT) and assets and liabilities
of the Group. Unlike exchange rate transaction risk, exchange
rate translation risk does not necessarily affect future cash
flows. The Group’s equity position reflects changes in book values
caused by exchange rates. In general, Daimler does not hedge
against exchange rate translation risk.