Merck 2008 Annual Report Download - page 131
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Other disclosures
[38] Derivative financial instruments
We use derivative financial instruments exclusively to hedge currency and interest
rate positions, and thereby minimize currency risks and financing costs caused by
exchange rate or interest rate fluctuations. The instruments used are marketable for-
ward exchange contracts and interest rate swaps. The strategy to hedge the transaction
risk arising from currency fluctuations is set by a Group interest rate and currency
committee, which meets on a regular basis. A review period of up to 36 months nor-
mally serves as the basis. Every hedge must relate to an underlying trans action that
either already exists or is definitely expected to take place (ban on speculation). Cur-
rency risks from financial assets or loans denominated in foreign currencies are gen-
erally hedged. The use of such derivative contracts is governed by internal regulations,
and derivative transactions are subject to continuous risk management procedures.
Trading, settlement and control functions are strictly separated, and this separation is
monitored by our internal audit department. Derivative contracts are only entered into
with banks that have a good credit rating and they are restricted to the hedging of our
business operations and related financing transactions.
The following derivative financial positions were held as of the balance sheet date:
€ million
Nominal volume Fair value
Dec. 31, 2008 Dec. 31, 2007 Dec. 31, 2008 Dec. 31, 2007
Cash flow hedge 936.9 760.9 74.6 0.1
Fair value hedge 53.5 102.1 2.6 –0.2
Without hedge accounting 3,283.9 2,064.2 44.9 4.7
Total forward exchange contracts 4,274.3 2,927.2 122.1 4.6
Interest rate swaps 500.0 500.0 –0.6 –28.3
4,774.3 3,427.2 121.5 –23.7
The nominal volume is the aggregate of all buy and sell amounts relating to derivative
contracts. The fair values result from the valuation of open positions at market prices,
ignoring any opposite movements in the value of the underlyings. They correspond to
the income or expenses which would result if the derivatives contract were closed out
as of balance sheet date. Transactions are recognized at fair value on the basis of
quoted prices or current market data provided by a recognized information service.
The maturity structure of the hedging transactions (nominal volume) is as follows as
of the balance sheet date:
€ million
Remaining
maturity
less than
1 year
Remaining
maturity
more than
1 year
Total
Dec. 31,
2008
Remaining
maturity
less than
1 year
Remaining
maturity
more than
1 year
Total
Dec. 31,
2007
Forward exchange
contracts 4,003.6 270.7 4,274.3 2,717.0 210.2 2,927.2
Interest rate swaps – 500.0 500.0 – 500.0 500.0
4,003.6 770.7 4,774.3 2,717.0 710.2 3,427.2
126 | Merck Annual Report 2008