Mercedes 2002 Annual Report Download - page 86

80 |Analysis of the Financial Situation
The average and period-end values-at-risk of derivative financial
instruments used to hedge exchange rate risk decreased
in 2002, primarily as a result of lower foreign exchange rate
volatilities, despite a slightly increased foreign exchange
derivatives’ volume.
Asset and liability management
DaimlerChrysler holds a variety of interest rate sensitive
assets and liabilities to manage its liquidity and cash needs of
the day-to-day operations. A substantial volume of interest
rate sensitive assets and liabilities is related to the leasing and
sales financing business operated by DaimlerChrysler
Services. The leasing and sales financing business enters into
transactions with customers which primarily result 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, the 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 indus-
trial business and financial services at the Group level. It 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 following table shows value-at-risk figures for Daimler-
Chrysler’s 2002 and 2001 portfolio of interest-rate sensitive
financial instruments. We have computed the average
exposure based on an end-of-quarter basis.
Equity price risk management
DaimlerChrysler also holds to a minor degree investments in
equity securities as a part of its strategy to manage excess
liquidity. The Group hedges the risk inherent in these securi-
ties mainly through equity derivatives. Since DaimlerChrysler
has significantly reduced the portfolio of equity securities in
2001, the corresponding market risk is currently not material.
Thus, the Group is not presenting the value-at-risk figures
for the remaining equity price risk. According to international
banking standards we do not include investments in equity
securities, which we classify as long term investments in the
equity price risk assessment.
Ratings
On July 19, 2002, the rating agency Standard & Poor’s (S&P)
upgraded the outlook of DaimlerChrysler’s long-term rating
from negative to stable after the publication of the second-
quarter financial statements. S&P’s explanation was that the
measures to improve performance were taking hold at the
Chrysler Group and Freightliner. The long-term and short-term
ratings remained unchanged, at BBB+ and A-2 respectively.
The rating agency Moody’s Investors Service (Moody’s) did not
change DaimlerChrysler’s rating or outlook in 2002. At the
year-end, the long-term rating from Moody’s was A-3 with a
negative outlook, and the short-term rating was P-2.
Legal proceedings
Various legal proceedings are pending against the Group.
DaimlerChrysler believes that such proceedings, other than
the purported class actions by South African plaintiffs and
the shareholder lawsuit discussed below, constitute ordinary
routine litigation incidental to its business.
Various legal proceedings pending against DaimlerChrysler
Corporation allege defects in various components (including
door and liftgate latches, occupant restraint systems, seats,
brake systems, and fuel systems) in several different vehicle
models or allege design defects relating to vehicle stability
(rollover propensity), pedal misapplication (sudden accelera-
tion), or crashworthiness. Some of these proceedings seek
repair or replacement of the vehicles or compensation for
their alleged reduction in value, while others seek recovery for
personal injuries. Adverse decisions in these proceedings
could require DaimlerChrysler Corporation to pay substantial
compensatory and punitive damages, or undertake service
actions, recall campaigns or other costly actions.
In 2002, the average and period-end value-at-risk of our
portfolio of interest rate sensitive financial instruments
decreased, primarily due to less volatile interest rates and a
reduced mismatch in terms of interest rate maturities
between both, the receivables from the Group’s leasing and
sales financing business and the respective funding of that
business.
In millions of 3
Value-at-Risk
Average
for
2002
12.31.
2001
Average
for
2001
185 334 272157
12.31.
2002
Interest-rate-sensitive
financial instruments