Nissan 2011 Annual Report Download - page 36

Maintaining Trust Through Transparency
2) Financial Market
Nissan is exposed to various financial market related risks, such as foreign exchange, interest rates
and commodity prices. It is general policy of Nissan not to use derivative products as a primary tool
to manage foreign exchange and commodity price risks, as it will not provide a permanent solution
to mitigate the risks. In exceptional cases, Nissan does hedge select foreign exchange and
commodity price risks. Nissan is taking the following measures to minimize financial market risks.
Foreign exchange
As a company engaged in export activities, Nissan is faced with various foreign currency exposures
which results from currency of input cost being different from currency of sale to customer. In order
to minimize foreign exchange risk on a more permanent basis, Nissan is working to reduce foreign
currency exposure by such measures as shifting production overseas, and procurement of raw
material and parts in foreign currencies. In the short term, Nissan may hedge risks in foreign
exchange volatility within a certain range by using derivative products in accordance with the
Company’s “Policies and Procedures for Risk Management and Authority Regarding Derivative
Transactions”.
Interest rate
The interest rate risk management policy is based on two principles: long-term investments and
permanent portion of working capital are financed at fixed interest rates while non-permanent
portion of working capital and liquidity reserves are built at floating rates.
Commodity
Nissan purchases most of the raw materials in the form of parts provided by the suppliers, while
certain raw materials are purchased directly. Therefore, risk of price fluctuation of the raw materials
appears as the fluctuation of the price of the parts paid to the suppliers.
In that context, because Nissan reflects the fluctuation of the prices of the raw materials based
on market-oriented price revision rules, Nissan is exposed to the price fluctuation risks of raw
materials, no matter whether it is purchased directly or indirectly. For precious metals, which are
used in catalysts, Nissan is making continuous efforts to reduce its usage by technological
innovation, in order to minimize commodity risk. In the short term, Nissan manages commodity price
volatility exposure through use of fixed rate purchase contracts where commodity price is fixed for a
period of time and also Nissan may hedge risks in commodity price volatility within a certain range
by use of derivative products in accordance with the Company’s “Policies and Procedures for Risk
Management and Authority Regarding Derivative Transactions”.
3) Sales Finance
Interest rate risk management
The Sales financing business is exposed to interest rate risks. Interest rate risk is defined as the
potential variance in the earnings of an entity or the fair value of the portfolio that would result from
a fluctuation in the general level of market interest rates where funds with differing fixed-rate
periods or differing terms are financed and invested.
Nissan measures the risks by using the sensitivity analysis with various interest rate scenarios
and determines the risk tolerance level. Nissan controls the interest rate maturities of both assets
and liabilities to maintain the risks within the acceptable tolerance level.
Sensitivity analysis mentioned above uses statistic models, such as a Monte Carlo Simulation
Method. However, actual fluctuation of market interest rate and its impact may deviate significantly
from the assumptions used in the model.
Nissan enters into interest rate derivative financial instruments to maintain the potential variability
of interest rates at desired level of risk exposure. The main objective of these transactions is to
mitigate the risks and not to pursue the speculative profit maximization.
Credit risks
Nissan is exposed to the risks of failure to recover the full value of financial receivables for auto
credit and lease business with retail customers and for dealer finance business, due to changes in
the economic situation and credit quality of customers. Nissan manages the credit risks closely by
Corporate Governance
Performance Corporate DataMid-term Plan
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NISSAN Annual Report 2011