Mercedes 2010 Annual Report Download - page 240

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Cash inflows and outflows of the business segments are offset
if they are denominated in the same currency. This means that
the exchange rate risk resulting from revenue generated in a
particular currency can be offset by costs in the same currency,
even if the revenue arises from a transaction independent of
that in which the costs are incurred. As a result, only the net ex-
posure is subject to transaction risk. In addition, natural hedging
opportunities exist to the extent that currency exposures of the
operating businesses of individual segments offset each other
at Group level, thereby reducing overall currency exposure. These
natural hedges eliminate the need for hedging to the extent of
the matched exposures. To provide an additional natural hedge
against any remaining transaction risk exposure, Daimler gen-
erally strives to increase cash outflows in the same currencies
in which the Group has a net excess inflow.
In order to mitigate the impact of currency exchange rate
fluctuations for the operating business (future transactions),
Daimler continually assesses its exposure to exchange rate
risks and hedges a portion of those risks by using derivative
financial instruments. These hedging transactions mainly
represent macro hedges. Daimler’s Foreign Exchange Committee
(FXCo) manages the Group’s exchange rate risk and its hedging
transactions through currency derivatives. The FXCo consists of
the Chief Financial Officer, the head of the Investor Relations &
Treasury, and the heads of the Controlling departments of the
relevant segments as well as Corporate Controlling. The Cor-
porate Treasury department assesses foreign currency exposures
and carries out the FXCo’s decisions concerning foreign cur-
rency hedging through transactions with international financial
institutions. Risk Controlling regularly informs the Board of
Management of the actions taken by Corporate Treasury based
on the FXCo’s decisions.
The Group’s targeted hedge ratios for forecasted operating
cash flows in foreign currency are indicated by a reference model.
On the one hand, the hedging horizon is naturally limited by
uncertainty related to cash flows that lie far in the future, and,
on the other hand, it may be limited by the fact that appropriate
currency contracts are not available. This reference model aims
to protect the Group from unfavorable movements in exchange
rates while preserving some flexibility to participate simultaneously
in favorable developments. Based on this reference model
and depending on the market outlook, the FXCo determines the
hedging horizon, which usually varies from one to three years,
as well as the average hedge ratios. Reflecting the character
of the underlying risks, the hedge ratios decrease with increasing
maturities. At year-end 2010, the centralized foreign exchange
management showed an unhedged position in the automotive
business for the underlying forecasted cash flows in US dollars
in calendar year 2011 of 28%. The corresponding figure at year-
end 2009 for calendar year 2010 was 30%. The lower unhedged
position compared to last year contributes to a lower exposure
of cash flows to currency risk with respect to the US dollar.
The hedged position of the operating vehicle businesses is de-
termined by the amount of derivative currency contracts
held. The derivative financial instruments used to cover foreign
currency exposure are primarily forward foreign exchange
contracts and currency options. Daimler’s guidelines call for a
mixture of these instruments depending on the view of market
conditions. Value at risk is used to measure the exchange rate
risk inherent in these derivative financial instruments.