Mercedes 2012 Annual Report Download - page 245

254
Finance market risks
The global nature of its businesses exposes Daimler to signif-
icant market risks resulting from fluctuations in foreign cur-
rency exchange rates and interest rates. In addition, the Group
is exposed to market risks in terms of commodity price risk
associated with its business operations, which the Group hedges
partially through derivative financial instruments. The Group
is also exposed to equity price risk in connection with its invest-
ments in listed companies (including EADS, Kamaz, Renault
and Nissan). If these market risks materialize, they will adversely
affect the Group’s financial position, cash flows and profitability.
Daimler manages market risks to minimize the impact of
fluctuations in foreign exchange rates, interest rates and com-
modity 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 management 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. In performing these analyses, Daimler quantifies its
market risk exposure to changes in foreign currency exchange
rates and interest rates on a regular 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 instruments 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 quanti-
fied. Based on expected volatilities and correlations of these
market risk factors which are obtained from the RiskMetrics™
dataset, a statistical 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
international 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 manage-
ment. 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 between the
US dollar and the euro, which also apply to the export of vehicles
to China and between the British pound and the Euro.
In the operating vehicle business, 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 generating
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 revenue in foreign currencies and incurs manufac-
turing 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 trans-
action risk, but only to a minor degree compared to the
Mercedes-Benz Cars and Daimler Trucks segments. In addition,
the Group is indirectly exposed to transaction risk from its
equity-method investments.
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 indepen-
dent of that in which the costs are incurred. As a result, only
the net exposure is subject to transaction risk. In addition, natural
hedging opportunities exist to the extent that currency expo-
sures 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 generally strives to increase cash outflows in the same
currencies in which the Group has a net excess inflow.