Mercedes 2001 Annual Report Download - page 113

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Other Notes 109
The carrying amounts of cash and other receiv-
ables approximate fair values due to the short-term
maturities of these instruments.
The methods and assumptions used to determine
the fair values of other financial instruments are sum-
marized below:
Financial Assets and Securities – The fair values of
securities were estimated using quoted market prices.
The Group has certain equity investments in related
and affiliated companies not presented in the table, as
these investments are not publicly traded and determi-
nation of fair values is impracticable.
Receivables from Financial Services – The carrying
amounts of variable rate finance receivables were
estimated to approximate their fair values since the
contract rates of those receivables approximate current
market rates. The fair values of fixed rate finance re-
ceivables were estimated by discounting expected cash
flows using the current interest rates at which compa-
rable loans with identical maturity would be made as of
December 31, 2001 and 2000.
The fair values of residual cash flows and other
subordinated amounts arising from receivable sale
transactions were estimated by discounting expected
cash flows at current interest rates.
Financial Liabilities – The fair value of publicly
traded debt was estimated using quoted market prices.
The fair values of other long-term notes and bonds were
estimated by discounting future cash flows using mar-
ket interest rates. The carrying amounts of commercial
paper and borrowings under revolving credit facilities
were assumed to approximate fair value due to their
short maturities.
Interest Rate Contracts – The fair values of existing
instruments to hedge interest rate risks (e.g. interest
rate swap agreements) were estimated by discounting
expected cash flows using market interest rates over
the remaining term of the instrument. Interest rate
options are valued on the basis of quoted market prices
or on estimates based on option pricing models.
Currency Contracts – The fair values of forward
foreign exchange contracts were based on European
Central Bank reference exchange rates adjusted for
the respective interest rate differentials (premiums
or discounts). Currency options were valued on the
basis of quoted market prices or on estimates based
on option pricing models.
Equity Contracts – The fair values of existing
instruments to hedge equity price risk (e. g. futures
or options) were determined on the basis of quoted
market prices or on estimates based on option pricing
models.
c) Credit Risk
The Group is exposed to credit-related losses in the
event of non-performance by counterparties to financial
instruments. Counterparties to the Group’s financial in-
struments represent, in general, international financial
institutions. DaimlerChrysler does not have a signifi-
cant exposure to any individual counterparty, based on
the rating of the counterparties performed by estab-
lished rating agencies. The Group believes the overall
credit risk related to utilized derivatives is insignifi-
cant.
d) Accounting for and Reporting of Financial
Instruments (Other than Derivative Instruments)
The income or expense of the Group’s financial instru-
ments (other than derivative instruments), with the
exception of receivables from financial services and fi-
nancial liabilities related to leasing and sales financing
activities, is recognized in financial income, net. Inter-
est income on receivables from financial services and
gains and losses from sales of receivables are recog-
nized as revenues. Interest expense on financial liabili-
ties related to leasing and sales financing activities are
recognized as cost of sales. The carrying amounts of
the financial instruments (other than derivative instru-
ments) are included in the consolidated balance sheets
under their related captions.
e) Accounting for and Reporting of Derivative
Instruments and Hedging Activities
Foreign Currency Risk Management
As a consequence of the global nature of
DaimlerChrysler’s businesses, its operations and its re-
ported financial results and cash flows are exposed to
the risks associated with fluctuations in the exchange
rates of the U.S. dollar, the euro and other world cur-
rencies. The Group’s businesses are exposed to trans-
action risk whenever revenues of a business are
denominated in a currency other than the currency
in which the business incurs the costs relating to those
revenues. This risk exposure primarily affects the
Mercedes-Benz Passenger Cars & smart segment.
The Mercedes-Benz Passenger Cars & smart segment
generates its revenues mainly in the currencies of the
countries in which cars are sold, but it incurs
manufacturing costs primarily in euros.