Merck 2014 Annual Report Download - page 239

234 CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Currency hedging serves to economically protect the Group from
the foreign exchange risks of the following types of transaction:
→ Forecast transactions in non-functional currency, the expected
probability of which within the next 36 months is very high,
→ Off-balance sheet firm purchase commitments of the next 36
months in non-functional currency,
→ Intragroup financing in non-functional currency as well as
→ Receivables and liabilities in non-functional currency
Exchange rate fluctuations of mainly the following currencies
against the euro were hedged:
Nominal volume € million Dec. 31, 2014 Dec. 31, 2013
USD 10,233.5 3,219.9
JPY 920.8 465.2
CHF 431.2 603.4
GBP 383.6 347.3
TWD 255.5 215.3
Forecast transactions and firm purchase commitments in non-
functional currency are hedged using forward exchange trans-
actions and currency options which are due within the next
36months. Overall, forecast transactions and firm purchase com-
mitments in non-functional currency were hedged in the amount
of €9,044.6 million (2013: €1,318.2 million). One of the major
components is the hedge entered into in 2014 in relation to the
expected U.S. dollar-denominated purchase price payment for the
proposed acquisition of the Sigma- Aldrich Corporation, USA.
All hedging transactions for forecast transactions and firm
purchase commitments in non-functional currency represent cash
flow hedges.
Intragroup financing as well as receivables and payables in
non-functional currency are hedged exclusively and fully using
forward exchange contracts. Overall, balance sheet items amount-
ing to €4,029.8 million (2013: €4,147.9 million) were hedged. In
this context, the hedging transactions are largely purely economic
hedges for which hedge accounting is not applied.
Interest hedges serve to economically protect the Group from
the interest rate risks from the forecast and highly probable refi-
nancing of a bond maturing in 2015 as well as from an existing
variable interest private placement.
The planned refinancing was hedged to fix the interest rate
level using forward started payer interest rate swaps with a nom-
inal volume of €550.0 million and interest payments from 2015
to 2022. The existing variable interest private placement was
hedged using a payer interest rate swap with a nominal volume of
€ 100.0 million and interest payments until 2015. All interest
hedging relationships represented cash flow hedges.
Overall, income of €411.7 million (2013: €125.5 million) from the
fair value measurement of derivatives designated as cash flow
hedges was recognized in equity in 2014. € 43.0 million was
transferred from equity and recognized as income (2013: €26.5
million recognized as income). In 2014, no ineffectiveness resulted
from hedge accounting.
(56) MANAGEMENT OF FINANCIAL RISKS
Market fluctuations with respect to foreign exchange and interest
rates represent significant profit and cash flow risks for the Group.
The Group aggregates these Group-wide risks and steers them
centrally also by using derivatives. The Group uses scenario anal-
yses to estimate existing risks of foreign exchange and interest
rate fluctuations. The Group is not subject to any material risk
concentration from financial transactions. The Report on Risks
and Opportunities included in the Group Management Report pro-
vides further information on the management of financial risks.
Foreign exchange risks
Owing to its international business focus, the Group is exposed to
foreign exchange-related transaction risks within the scope of
both ordinary business and financing activities. Different strate-
gies are used to limit or eliminate these risks. Foreign exchange
risks from recognized transactions are eliminated as far as possible
through the use of forward exchange contracts. Foreign exchange
risks arising from forecast transactions are analyzed regularly
and reduced if necessary through forward exchange contracts or
currency options by applying the hedge accounting rules.