Mercedes 2002 Annual Report Download - page 141

Other Notes |135
d) Accounting for and Reporting of Financial Instruments
(Other than Derivative Instruments)
The income or expense of the Group’s financial instruments
(other than derivative instruments), with the exception of
receivables from financial services and financial liabilities
related to leasing and sales financing activities, is recognized
in financial income, net. Interest income on receivables from
financial services and gains and losses from sales of receiv-
ables are recognized as revenues. Interest expense on finan-
cial liabilities related to leasing and sales financing activities
are recognized as cost of sales. The carrying amounts of
the financial instruments (other than derivative instruments)
are included in the consolidated balance sheets under their
related captions.
e) Accounting for and Reporting of Derivative Instru-
ments and Hedging Activities
Foreign Currency Risk Management
As a consequence of the global nature of DaimlerChrysler’s
businesses, its operations and its reported financial results
and cash flows are exposed to the risks associated with fluc-
tuations in the exchange rates of the U.S. dollar, the euro and
other world currencies. The Group’s businesses are exposed
to transaction 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 Car Group
segment. The Mercedes Car Group segment generates its rev-
enues mainly in the currencies of the countries in which cars
are sold, but it incurs manufacturing costs primarily in euros.
The Commercial Vehicles segment is subject to transaction
risk, to a lesser extent, because of its global production net-
work. At Chrysler Group revenues and costs are principally
generated in U.S. dollars, resulting in a relatively low transac-
tion risk for this segment. The Other Activities segment is
exposed to transaction risk resulting primarily from the U.S.
dollar exposure of the aircraft engine business, which Daimler-
Chrysler conducts through MTU Aero Engines.
In order to mitigate the impact of currency exchange rate
fluctuations, DaimlerChrysler continually assesses its expo-
sure to currency risks and hedges a portion of those risks
through the use of derivative financial instruments. Responsi-
bility for managing DaimlerChrysler’s currency exposures and
use of currency derivatives is centralized within the Group’s
Currency Committee. The Currency Committee, which con-
sists 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 Corporate Treasury and Risk Con-
trolling. Corporate Treasury implements decisions concerning
foreign currency hedging taken by the Currency Committee.
Risk Controlling regularly informs the Board of Management
of the actions of Corporate Treasury based on the decisions of
the Currency Committee.
Interest Rate and Equity Price Risk Management
DaimlerChrysler holds a variety of interest rate sensitive
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. Daimler-
Chrysler coordinates funding activities of the industrial
business and financial services on the Group level. The Group
uses interest 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.
The Group assesses interest rate risk by continually identi-
fying 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 DaimlerChrysler’s outstanding interest rate
exposures 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
expected impact of changes in interest rates on the Group’s
future cash flows.
DaimlerChrysler also holds, to a minor extent, investments
in equity securities as part of its strategy to manage excess
liquidity. The risk inherent in these securities is hedged through
the use of equity derivatives.