Mercedes 2002 Annual Report Download - page 85

Analysis of the Financial Situation |79
DaimlerChrysler’s services business includes financial and
mobility services. The financing and leasing of the Group’s
new vehicle business are extremely important. The necessary
capital is largely refinanced by the external financial markets,
with associated exchange rate and interest rate risks. In addi-
tion, risks of counterparty default in the financing business
and residual value risks exist, which can arise with the market-
ing of returned lease vehicles. With the formation of Daimler-
Chrysler Bank in 2002, the range of services was extended to
include financial investing. The resulting extended spectrum
of risks has no significant influence on the Group.
DaimlerChrysler has a proportionate share of the risks of
Mitsubishi Motors in line with its investment stake. Above all,
the risks are contingent on the overall economic development
in Japan and in the NAFTA region. Risks from warranty com-
mitments could also be detrimental to the earnings situation
at Mitsubishi Motors.
As a result of the investment in EADS, DaimlerChrysler is
also partially exposed to their risks. The current significant
drop in the number of airline passengers is manifested in the
cost-cutting measures adopted by many airlines. This could
lead to a further reduction in the demand for aircraft and to
increased competition in the aircraft business with pressure
on EADS’ profitability. It is unlikely that such losses will
be compensated by increased demand in the military sector.
Transparency of market risks
The DaimlerChrysler Group is exposed to market risks from
changes in foreign currency exchange rates and interest rates.
To a minor degree the Group is also exposed to changes in
market prices of equity securities. These changes may
adversely affect DaimlerChrysler’s operating results and finan-
cial condition. The Group seeks to manage and control these
risks primarily through its regular operating and financing
activities, but, when we deem it appropriate, through the use
of derivative financial instruments. DaimlerChrysler evaluates
these market risks by monitoring changes in key economic
indicators and market information on an ongoing basis.
In order to quantify the foreign exchange rate 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 DaimlerChrysler express potential losses in fair
values and are based on the variance-covariance-approach
assuming a 99% confidence level and a holding period of five
days. Estimates of volatilities and correlations are primarily
drawn from the RiskMetrics™ datasets and supplemented
by additional exchange rate, interest rate and equity price
information.
The Group does not use financial instruments for specula-
tive purposes.
Following organizational standards in the international
banking industry, DaimlerChrysler maintains risk management
control systems independent of Corporate Treasury and with
a separate reporting line.
Foreign exchange rate management
The global nature of DaimlerChrysler’s business activities
results in cash receipts and payments denominated in various
currencies. Cash inflows and outflows of the business seg-
ments are offset and netted 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
exchange rate expectations, which are constantly reviewed.
The net assets of the Group which are invested in subsidiaries
and affiliated companies outside the euro zone are 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 values-at-risk figures for Daimler-
Chrysler’s 2002 and 2001 portfolio of derivative financial
instruments used to hedge the underlying currency exposure.
We have computed the average exposure based on an end-
of-quarter basis.
In millions of 3
Value-at-Risk
Average
for
2002
12.31.
2001
Average
for
2001
304 368 430236
12.31.
2002
1 Forward foreign exchange contracts, foreign exchange swap contracts, currency options.
Exchange rate
sensitive derivative
financial instruments 1