Merck 2008 Annual Report Download - page 133

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The interest expense of the euro benchmark bond, which was issued in 2005 with a
volume of € 500.0 million and a coupon of 3.75% was fixed to the six-month Euribor
rate through interest rate swaps and is measured as a fair value hedge.
[39] Management of financial risks
Fluctuations in the price of currencies and interest rates can result in significant profit
and cash flow risks for Merck. Therefore, Merck centralizes these risks as far as possi-
ble and steers them in a forward-looking manner, also by using derivative financial
instruments.
Foreign currency risks
Transaction risks: Owing to its international business focus, Merck is subject to currency
risks within the scope of both ordinary business and financing activities. Different
strategies are used to limit or exclude these risks.
In principle, currency risks from financing activities are eliminated as far as possible
through the use of forward exchange contracts. Currency risks arising from operating
business are analyzed regularly and reduced if necessary through forward exchange
contracts or currency options using hedge accounting.
The following table presents the net currency risk from expected and recognized
transactions in 2009 in the most important currencies:
€ million as of Dec. 31 CHF GBP JPY TWD USD
Foreign exchange risk from balance sheet items –464.6 136.3 185.4 6.6 –329.4
Foreign exchange risk from contingent business and
anticipated transactions –234.4 70.0 241.0 176.4 722.4
Transaction-related foreign exchange position –699.0 206.3 426.4 183.0 393.0
Position hedged by derivatives 674.5 –193.3 –370.4 –75.6 –169.4
Open-end foreign exchange risk position –24.6 13.0 56.0 107.4 223.6
Change in foreign exchange position due to a 10%
appreciation of the euro 2.5 –1.3 –5.6 –10.7 –22.4
Translation risks: Many Merck companies are outside the euro zone. The financial
statements of these companies are translated into euros. Exchange differences in the
assets of these companies resulting from currency fluctuations are recognized in
equity.
Interest rate risks
Interest rate risks relate mainly to financial liabilities of € 1,301.4 million and mone-
tary deposits of € 756.4 million. If necessary, derivative financial instruments are
used to change fixed interest payments into variable interest payments. The aim is to
optimize the interest result and to minimize interest rate risks. Relative to net interest
liabilities on the balance sheet date, a parallel shift in interest rates by 100 basis
points would affect profits by € –1.0 million. This corresponds to an increase in interest
income of € 5.9 million on financial assets and additional interest expense of
€ 6.9 million on financial liabilities.
128 | Merck Annual Report 2008