Mercedes 2001 Annual Report Download - page 114

110 Other Notes
In order to mitigate the impact of currency ex-
change rate fluctuations, DaimlerChrysler continually
assesses its exposure to currency risks and hedges a
portion of those risks through the use of derivative
financial instruments. Responsibility for managing
DaimlerChrysler’s currency exposures and use of
currency derivatives is centralized within the Group’s
Currency Committee. The Currency Committee, which
consists of two separate subgroups, one for the Group’s
vehicle businesses and one for MTU Aero Engines, is
comprised of members of senior management from
each of the respective businesses as well as from Cor-
porate Treasury and Risk Controlling. Corporate Trea-
sury implements decisions concerning foreign currency
hedging taken by the Currency Committee. Risk Con-
trolling regularly informs the Board of Management of
the actions of Corporate Treasury based on the deci-
sions of the Currency Committee.
Interest Rate and Equity Price Risk Management
DaimlerChrysler holds a variety of interest rate sensi-
tive assets and liabilities to manage the liquidity and
cash needs of its day-to-day operations. In addition a
substantial volume of interest rate sensitive assets and
liabilities is related to the leasing and sales financing
business which is operated by DaimlerChrysler
Services. In particular, the Group’s leasing and sales
financing business enters into transactions with
customers, primarily resulting in fixed rate receivables.
DaimlerChrysler’s general policy is to match funding in
terms of maturities and interest rates. However, for a
limited portion of the receivables portfolio funding does
not match in terms of maturities and interest rates. As
a result, DaimlerChrysler is exposed to risks due to
changes in interest rates. DaimlerChrysler coordinates
funding activities of the industrial business and finan-
cial services on the group level. The Group uses inter-
est rate derivative instruments such as interest rate
swaps, forward rate agreements, swaptions, caps and
floors to achieve the desired interest rate maturities
and asset/liability structures.
DaimlerChrysler does not enter into these types of
derivative financial instruments for purposes other
than risk management.
The Group assesses interest rate risk by continu-
ally identifying and monitoring changes in interest rate
exposures that may adversely impact expected future
cash flows and by evaluating hedging opportunities.
The Group maintains risk management control
systems independent of Corporate Treasury to monitor
interest rate risk attributable to both DaimlerChrysler’s
outstanding or forecasted interest rate exposures as
well as its offsetting hedge positions. The risk manage-
ment control systems involve the use of analytical tech-
niques, including value-at-risk analyses, to estimate the
expected impact of changes in interest rates on the
Group’s future cash flows.
DaimlerChrysler also holds investments in equity
securities. These securities subject DaimlerChrysler to
risks due to changes in quoted market prices.
DaimlerChrysler uses derivative financial instruments
including futures and options to manage the risks
arising from changes in equity prices.
The Group assesses equity price risk by continu-
ally monitoring changes in key economic, industry and
market information and maintains risk management
control systems independent of Corporate Treasury to
monitor risks attributable to both DaimlerChrysler’s in-
vestments as well as its offsetting hedge positions. The
risk management control systems involve the use of
analytical techniques, including value-at-risk analyses,
to estimate the potential loss and manage the risks of
the Group’s investments.
Information with Respect to Fair Value Hedges
Gains and losses in fair value of recognized assets and
liabilities and firm commitments of operating transac-
tions as well as gains and losses on derivative financial
instruments designated as fair value hedges of these
recognized assets and liabilities and firm commitments
are principally recognized currently in revenues, as the
principal transactions being hedged involve sales of the
Group’s products. Net gains and losses in fair value of
both recognized financial assets and liabilities and de-
rivative financial instruments designated as fair value
hedges of these financial assets and liabilities are
recognized currently in financial income, net.
For the year ended December 31, 2001, net losses
of €17 million (2000: net gains of €15 million) were
recognized in revenues and financial income, net, re-
presenting principally the component of the derivative
instruments’ gain or loss excluded from the assessment
of hedge effectiveness and the amount of hedging
ineffectiveness.