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45.2 Risks and fair values of financial instruments
in other Deutsche Post World Net companies
Derivatives
As part of Deutsche Post World Net’s risk management strategy,
derivatives are used to offset risks from exchange rate, interest rate
and commodity price movements. Derivatives may generally be
used only if they can be allocated to an underlying. If possible,
the financial derivatives employed should satisfy the IAS 39 hedge
accounting criteria. The derivatives held by the companies are
continually measured and recognized at their fair values.
Liquidity management
Deutsche Post World Net’s liquidity management functions ensure
a sufficient supply of liquidity for Group companies, and eliminate
or reduce unexpected financial events (financing and investment
risk) for Deutsche Post World Net.
In October 2003, a bond (€1,000 million, 4.875% bond of
2003/2014) was issued by Deutsche Post Finance B.V., Rotterdam;
this bond is guaranteed by Deutsche Post AG. Together with the
existing cash funds and the Group credit lines extended by banks in
the amount of €3.9 billion that were unused as of the end of the
year, the Group has sufficient funds to finance its planned growth
and investments.
Currency risk and currency management
Currency risks arise from planned and completed transactions in
foreign currencies. At Deutsche Post World Net, foreign currency cash
flows are offset in good time and hedged centrally. Currency risks
are hedged using currency forwards, currency options, currency
swaps, and cross-currency swaps.
Planned and binding contracts for future transactions relating
to the supply of goods and services were hedged in the amount
of €1.1 billion as of year-end 2003. The net fair value amounted to
€ – 67.3 million. Short-term currency swaps amounting to €1.3 billion
were entered into to hedge intragroup financing and investments.
The net fair value at the balance sheet date amounted to €54 million.
Compared with the previous year, the open volume of cross-
currency swaps fell slightly to €446 million. These swaps are used
exclusively to hedge the exchange rate risk from long-term refinancing
in foreign currencies. The strong appreciation of the euro resulted
in a negative fair value of €42.9 million at the balance sheet date.
With the exception of the cross-currency swaps, all instruments
have a maximum of one year to maturity. Each hedging instrument
is allocated to a hedged item.
Commodity price risk
Fuels, in particular diesel fuel and kerosene, represent a direct cost
component in Deutsche Post World Net’s mail, express and logistics
business, and price increases can only be partly passed on to cus-
tomers. Fuel worth €130.6 million was hedged at the balance sheet
date. The net fair value amounted to €9.7 million.
Interest rate risk and interest rate management
Interest rate risk arises from changes in market interest rates for
financial assets and financial liabilities. We study interest rates
regularly to quantify the risk profile. Deutsche Post World Net uses
interest rate derivatives, such as interest rate swaps and options,
to achieve a balanced mix of differing interest rate terms in each
portfolio irrespective of the liquidity tied up in individual financial
contracts and thus limit the interest rate risk.
We use interest rate swaps to modify the fixed interest rates
of financial liabilities. Interest rate swaps are structured so that
Deutsche Post World Net pays a defined floating rate of interest on
a particular amount of notional principal, and receives in return
a certain fixed rate of interest on the same amount of notional
principal (or vice versa). However, principal payments are never
exchanged, only the interest payments. The maturities of swap
contracts are matched to the maturities of the hedged items.
If an interest rate swap contract increases the Company’s
fixed interest position because it is allocated to a floating rate
financial liability, the interest rate swap is classified as a cash flow
hedge under IAS 39. By contrast, if the interest rate swap exchanges
fixed interest payments for floating rate interest payments, it is
classified under IAS 39 as a fair value hedge.
To determine the fair value of an interest rate swap, the
expected future cash flows on both legs of the swap – i.e. the fixed
interest leg and the floating interest leg – are discounted on the
basis of the current yield curve. The difference between the two
values thus calculated produces the net fair value of the interest rate
swap. At December 31, 2003, Deutsche Post World Net had entered
into interest rate swaps with a notional volume of €2,627.5 million.
The net fair value of this interest rate swap position at the reporting
date was €27.6 million.
Interest rate options are used to fix an interest rate cap or
floor, but still allow one of the counterparties to take advantage of
favorable interest rate movements. If a cap is bought, the floating
interest rate is compared with the reference rate at the fixing date.
If the interest rate exceeds the cap strike rate of the option, the
buyer receives a cash payment in the amount of the difference
between the reference interest rate and the cap strike rate from the
option. Buying a floor option has the opposite effect of a cap.
The interest rate options traded by Deutsche Post World
Net are caps that allow the Group to take advantage of favorable
market developments to a certain extent. The interest rate options
are recognized as cash flow hedges under hedge accounting rules.
The fair value of interest rate options is estimated on the basis of
option pricing models. At December 31, 2003, Deutsche Post World
Net had entered into interest rate options with a notional volume
of €150 million and a net fair value of € –2.9 million.