Mercedes 1998 Annual Report Download - page 109

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105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b) Notional amounts and credit risk
The contract or notional amounts shown below do not always
represent amounts exchanged by the parties and, thus, are not
necessarily a measure for the exposure of DaimlerChrysler
through its use of derivatives. Currency contracts 28,204 22,912
Interest rate contracts 26,162 30,093
Balance Sheet information 19971998
At December 31,
Currency contracts include foreign exchange forward and
option contracts which are mainly utilized to hedge existing
receivables and liabilities, firm commitments and anticipated
transactions denominated in foreign currencies (principally
U.S. dollars, Japanese Yen and major European currencies).
The objective of the Group’s hedging transactions is to reduce
the market risk of its foreign denominated future cash flows to
exchange rate fluctuations. The Group has entered into
currency contracts for periods of one to five years.
The Group enters into interest and interest rate cross-currency
swaps, interest rate forward and futures contracts and interest
rate options in order to safeguard financial investments against
fluctuating interest rates as well as to reduce funding costs, to
diversify sources of funding, or to alter interest rate exposures
arising from mismatches between assets and liabilities.
The Group may be exposed to credit-related losses in the event
of non-performance by counterparties to financial instruments.
Counterparties to the Group’s financial instruments represent,
in general, international financial institutions. DaimlerChrysler
does not have a significant exposure to any individual
counterparty, based on the rating of the counterparties
performed by established rating agencies. The Group believes
the overall credit risk related to utilized derivatives is
insignificant.
The notional amounts of off-balance sheet financial
instruments are as follows:
29. INFORMATION ABOUT FINANCIAL INSTRUMENTS
a) Use of financial instruments
In the course of day-to-day financial management,
DaimlerChrysler purchases financial instruments, such as
financial investments, variable- and fixed-interest bearing
securities and stock, forward exchange contracts and currency
options. The Group also sells financial instruments such as
eurobonds, commercial paper and euro-medium-term-notes.
As a consequence, the Group may be exposed to risks from
changes in interest and currency exchange rates as well as
share prices. DaimlerChrysler uses derivative financial
instruments to reduce such risks. Without the use of these
instruments the Group’s market risks would be higher.
Based on regulations issued by regulatory authorities for
financial institutions, the Group has established guidelines for
risk assessment procedures and controls for the use of
financial instruments, including a clear segregation of duties
with regard to operating financial activities and settlement,
accounting and controlling.
Market risk in portfolio management is quantified according to
the “value-at-risk” method which is commonly used among
banks. Using historical variability of market values, potential
changes in value resulting from changes of market prices are cal-
culated on the basis of statistical methods. The maximum
acceptable market risk is established by senior management in
the form of risk capital, approved for a period not exceeding one
year. Adherence to risk capital limitations is regularly monitored.