Mercedes 2010 Annual Report Download - page 116

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Financial risks
Daimler is exposed to market risks from changes in foreign cur-
rency exchange rates, interest rates, commodity prices and share
prices. Market risks may adversely affect Daimler’s financial
position, cash flows and profitability. Daimler seeks to control
and manage these risks primarily through its regular operating
and financing activities and, if appropriate, through the use of deriv-
ative financial instruments. As part of the risk management
process, Daimler regularly assesses these risks by considering
changes in key economic indicators and market information.
Any market-sensitive instruments held in pension funds and other
postretirement pension benefit plans, including equity and inter-
est-bearing securities, are not included in the following analysis.
Exchange rate risks. The Daimler Group’s global reach means
that its business operations and financial transactions are con-
nected with risks arising from fluctuations of foreign exchange
rates, especially of the US dollar and other important currencies
against the euro. An exchange rate risk arises in the operating
business primarily when revenue is generated in a different currency
than the related costs (transaction risk). This applies in particular
to the Mercedes-Benz Cars division, as a major portion of its rev-
enue is generated in foreign currencies while most of its produc-
tion costs are incurred in euros. The Daimler Trucks division is also
exposed to such transaction risks, but only to a minor degree
because of its worldwide production network. Currency exposures
are gradually hedged with suitable financial instruments (predomi-
nantly foreign forward exchange contracts and foreign currency
options) in accordance with exchange rate expectations, which
are constantly reviewed. Exchange rate risks also exist in connec-
tion with the translation into euros of the net assets, revenues
and expenses of the subsidiaries of the Group outside the euro
zone (translation risk); these risks are not hedged.
Interest rate risks. Daimler holds a variety of interest rate sensi-
tive financial instruments to manage the cash requirements of
its business operations on a day-to-day basis. Most of these finan-
cial instruments are held in connection with the financial services
business of Daimler Financial Services, whose policy is generally
to match funding in terms of maturities and interest rates.
However, to a limited extent, the funding does not match in terms
of maturities and interest rates, which gives rise to the risk of
changes in interest rates. The funding activities of the industrial
business and the financial services business are coordinated
centrally at Group level. Derivative interest rate instruments such
as interest rate swaps and forward rate agreements are used
to achieve the desired interest rate maturities and asset/liability
structures (asset and liability management).
Equity price risks. Daimler holds investments; in accordance
with international banking standards, Daimler does not include
equity investments that the Group classifies as long-term, such
as in EADS, Tognum, Kamaz, Renault and Nissan, in the assess-
ment of equity price risks.
Commodity price risks. Associated with Daimler’s business
operations, the Group is exposed to changes in the prices
of commodities. We address these procurement risks by means
of concerted commodity and supplier risk management.
To a minor extent, derivative commodity instruments are used
to reduce some of the Group’s commodity risks, primarily the
risks associated with the purchase of metals.
Liquidity risks. In the normal course of business, we make use
of bonds, commercial paper and securitized transactions as
well as bank credit in various currencies, primarily to refinance
the leasing and sales-financing business. A negative develop-
ment of the capital markets could increase the Group’s financing
costs. More expensive refinancing would also have an impact
on the competitiveness and profitability of our financial services
business; a limitation of the financial services business would
have a negative effect on the automotive business.
Risks from changes in credit ratings. Daimler’s creditworthi-
ness is assessed by the rating agencies Standard & Poor’s,
Moody’s Investors Service, Fitch Ratings and DBRS. Upgrades
of the credit ratings issued by the rating agencies could reduce
the Group’s cost of borrowing. Downgrades are connected with
possible risks, which could have a negative impact on the
Group’s financing.