Mercedes 2001 Annual Report Download - page 69

Analysis of the Financial Situation 65
Average
for
Average
for
Value-at-Risk
In millions of € 2001 12.31.200012.31.2001
1) Forward foreign exchange contracts, foreign exchange swap
contracts, currency options.
Exchange rate
sensitive derivative
financial instruments1)368 430 541 574
2000
The success of the turnaround plans for Chrysler
Group, the Freightliner, Sterling and Thomas Built
Buses business unit as well as Mitsubishi Motors
depends crucially upon the extent to which manage-
ment can continue to successfully implement the
planned measures despite worsened market conditions.
DaimlerChrysler’s financial services business
primarily consists of the leasing and financing of Group
products, mainly vehicles. Refinancing is carried out to
a considerable extent through external capital markets,
which involves the risk of interest rate movements.
In addition, a risk of default exists in the financing
business as well as residual value risks in the leasing
business when vehicles are sold by the Group at the
end of their leases.
Through our 33% stake in EADS, we also participate
indirectly in the company’s risks. The success of EADS
mainly depends on the competitiveness and market
success of the Airbus aircraft. The market for civil air-
craft is subject to cyclical fluctuations, as the worldwide
volume of orders and deliveries of new aircraft are
determined by airlines’ profitability and fleet-renewal
cycles.
Transparency of market risks. The DaimlerChrysler
Group is exposed to market risks from changes in
foreign currency exchange rates, interest rates and
equity prices. These changes may adversely affect
DaimlerChrysler’s operating results and financial
condition. The Group seeks to manage these risks
through its regular operating and financing activities
and, when deemed appropriate, through the use of
derivative financial instruments. DaimlerChrysler
controls and manages foreign exchange risk, interest
rate risk and equity price risk by continually monitoring
changes in key economic indicators and market
information.
In order to quantify the foreign exchange risk,
interest rate risk and equity price risk of the Group on
a continuous basis, DaimlerChrysler’s risk management
control systems employ value-at-risk analyses as
recommended by the Bank for International Settlements.
The value-at-risk calculations employed by Daimler-
Chrysler express potential losses in fair values and are
based on the variance-covariance approach and assume
a 99% confidence level and a holding period of five days.
Estimates of volatilities and correlations are primarily
drawn from the RiskMetrics™ datasets and supple-
mented by additional exchange rate, interest rate and
equity price information.
The Group does not use financial instruments for
trading or other speculative purposes.
Following organizational standards in the inter-
national banking industry, DaimlerChrysler maintains
risk management control systems independent of
Corporate Treasury and with a separate reporting line.
Foreign exchange rate management. The international
orientation of our business activities results in cash
receipts and payments denominated in various curren-
cies. Cash inflows and outflows balance themselves
out if they are denominated in the same currency.
Within the framework of central currency management,
currency exposures are regularly assessed and hedged
with suitable financial instruments according to ex-
change rate expectations, which are constantly reviewed.
The net assets of the Group which are invested in sub-
sidiaries and affiliated companies outside the euro zone
remain generally not hedged against currency risks.
However, in specific circumstances, DaimlerChrysler
seeks to hedge the currency risk inherent in certain of
its long-term investments.
The following table shows value-at-risk figures for
DaimlerChrysler’s 2001 and 2000 portfolio of foreign
exchange rate sensitive derivative instruments.