Mercedes 2010 Annual Report Download - page 239

Consolidated Financial Statements | Notes to the Consolidated Financial Statements | 235
Finance market risks
The global nature of its businesses exposes Daimler to signifi-
cant market risks resulting from fluctuations in foreign currency
exchange rates and interest rates. In addition, the Group is
exposed to market risks in terms of commodity price risk associ-
ated with its business operations, which the Group hedges
partially through derivative financial instruments. The Group is
also exposed to equity price risk. If these market risks mate-
rialize, they will adversely affect the Group’s financial position,
cash flows and profitability.
Daimler manages market risks to minimize the impact of fluc-
tuations in foreign exchange rates, interest rates and commodity
prices on the results of the Group and its segments. The Group
calculates its overall exposure to these market risks to provide
the basis for hedging decisions, which include the selection of
hedging instruments and the determination of hedging volumes
and the corresponding periods. Decisions regarding the man-
agement of market risks resulting from fluctuations in foreign
exchange rates, interest rates (asset-/liability management)
and commodity prices are regularly made by the relevant Daimler
risk management committees.
As part of its risk management system, Daimler employs value
at risk analyses as recommended by the Bank for International
Settlements. In performing these analyses, Daimler quantifies
its market risk exposure to changes in foreign currency exchange
rates and interest rates on a continuous basis by predicting
the maximum loss over a target time horizon (holding period)
and confidence level.
The value at risk calculations employed:
– express potential losses in fair values, and
– assume a 99% confidence level and a holding period of five
days.
Daimler calculates the value at risk for exchange rate and interest
rate risk according to the variance-covariance approach. The
value at risk calculation method for commodity hedging instru-
ments is based on the Monte Carlo simulation.
When calculating the value at risk by using the variance-
covariance approach, Daimler first computes the current fair
value of the Group’s financial instruments portfolio. Then the
sensitivity of the portfolio value to changes in the relevant market
risk factors, such as particular foreign currency exchange
rates or interest rates of specific maturities, is quantified. Based
on expected volatilities and correlations of these market risk
factors which are obtained from the RiskMetrics™ dataset, a statis-
tical distribution of potential changes in the portfolio value
at the end of the holding period is computed. The loss which is
reached or exceeded with a probability of only 1% can be
deduced from this calculation and represents the value at risk.
The Monte Carlo simulation uses random numbers to generate
possible changes in market risk factors over the holding period.
The changes in market risk factors indicate a possible change
in the portfolio value. Running multiple repetitions of this simu-
lation leads to a distribution of portfolio value changes.
The value at risk can be determined based on this distribution
as the portfolio value loss which is reached or exceeded with
a probability of 1%.
In accordance with the risk management standards of the inter-
national banking industry, Daimler maintains its financial
controlling system independent of Corporate Treasury and with
a separate reporting line.
Exchange rate risk. Transaction risk and currency risk man-
agement. The global nature of Daimler’s businesses exposes
cash flows and earnings to risks arising from fluctuations in
exchange rates. These risks primarily relate to fluctuations be-
tween the US dollar and the euro.
In the operating vehicle businesses, the Group’s exchange
rate risk primarily arises when revenue is generated in a currency
that is different from the currency in which the costs of gener-
ating the revenue are incurred (so-called transaction risk). When
the revenue is converted into the currency in which the costs
are incurred, it may be inadequate to cover the costs if the value
of the currency in which the revenue is generated declined in the
interim relative to the value of the currency in which the costs were
incurred. This risk exposure primarily affects the Mercedes-
Benz Cars segment, which generates a major portion of its reve-
nue in foreign currencies and incurs manufacturing costs
primarily in euros. The Daimler Trucks segment is also subject
to transaction risk, but to a lesser extent because of its global
production network. The Mercedes-Benz Vans and Daimler Buses
segments are also directly exposed to transaction risk, but
only to a minor degree compared to the Mercedes-Benz Cars and
Daimler Trucks segments. In addition, through its proportionate
share in the results of its equity investment in EADS, the Group
is indirectly exposed to transaction risk.