Merck 2010 Annual Report Download - page 192

The maturity structure of the hedging transactions (nominal volume) is as follows as of the bal-
ance sheet date:
EUR million
Remaining
maturity
less than
1 year
Remaining
maturity
more than
1 year
Total
Dec. 31,
2010
Remaining
maturity
less than
1 year
Remaining
maturity
more than
1 year
Total
Dec. 31,
2009
Forward exchange
contracts 4,454.0 2,960.0 7,414.0 2,598.3 385.7 2,984.0
Interest rate swaps 500.0 100.0 600.0 – 600.0 600.0
Interest rate futures 1,500.0 – 1,500.0 – – –
6,454.0 3,060.0 9,514.0 2,598.3 985.7 3,584.0
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The forward exchange contracts that are entered into to reduce the exchange rate risk with a
total nominal volume of EUR 7,414.0 million primarily serve to hedge intercompany financing in
foreign currency. These mainly served to hedge fluctuations in the exchange rates of the U.S. dollar
(EUR 4,046.8 million), the Swiss franc (EUR 483.5 million), the Japanese yen (EUR 845.1 million),
the Taiwanese dollar (EUR 533.2 million) and the British pound (EUR 494.7 million).
Forecast transactions are only in a cash flow hedging relationship if the occurrence can be
assumed to be highly probable. The nominal volume of hedged future transactions amounted to
EUR 3,713.5 million (2009: EUR 902.0 million) as of the balance sheet date and related mainly to
the hedging of future sales in U.S. dollars, Taiwanese dollars and Japanese yen as well as costs in
Swiss francs. The occurrence of hedged items is expected within the next 36 months. Moreover,
we use forward exchange contracts to hedge financial investments and borrowings in foreign cur-
rency and designate them as cash flow hedges. During the fiscal year, expenses of EUR 125.3 mil-
lion (2009: income totaling EUR 47.5 million) from the fair value measurement of derivatives was
recognized in equity. EUR 17.2 million (2009: EUR 64.8 million) was transferred from equity and
recognized as expense (2009: income).
The interest expense of the euro benchmark bond, which was issued in 2005 with a volume of
EUR 500 million and a coupon of 3.75% was variabilized to the six-month Euribor through interest
rate swaps and is measured as a fair value hedge. The fair value measurement of the bond led to
income of EUR 0.2 million (2009: expense of EUR 15.2 million). This was offset by an expense in the
same amount from the interest rate swap. Net interest payments on the bond and interest rate swaps
were fixed in 2010 by forward exchange contracts based on the 6-month Euribor forward curve.
The interest expense of the private placement of EUR 100 million made in the context of the debt
issuance program in 2009 was fixed by an interest rate swap of 3-month Euribor plus 0.77%, which
was carried in the balance sheet as a cash flow hedge. The fair value measurement of the interest
rate swap led to an expense of EUR 1.1 million (2009: 0.3 million). This amount was recognized in
equity at 100% effectiveness.
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 possible and steers them in a
forward-looking manner, also by using derivative financial instruments. More information on the
management of financial risks is provided in the Risk Report, which can be found in the Manage-
ment Report.
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188 Merck Annual Report 2010