Mercedes 2012 Annual Report Download - page 246

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7 | Consolidated Financial Statements | Notes to the Consolidated Financial Statements
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 finan-
cial instruments. Daimler’s Foreign Exchange Committee (FXCo)
manages the Group’s exchange rate risk and its hedging
transactions through currency derivatives. The FXCo consists
of representatives of the relevant segments and central
functions. The Corporate Treasury department aggregate for-
eign currency exposures from Daimler’s subsidiaries and
operative units and carries out the FXCo’s decisions concern-
ing foreign currency hedging through transactions with inter-
national 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;
on the other hand, it may also be limited by the fact that appro-
priate currency contracts are not available. This reference
model aims to protect the Group from unfavorable movements
in exchange rates while preserving some flexibility to partici-
pate 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 2012, 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 2013 of 27% and for the underlying forecasted
cash flows in British pounds in calendar year 2013 of 26%. The
corresponding figures at year-end 2011 for calendar year 2012
were 25% for US dollars and 15% for British pounds. The higher
unhedged position compared to last year contributes to a
higher exposure of cash flows to currency risk with respect to
the US dollar and British pound.
The hedged position of the operating vehicle businesses
is influenced 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 assessment
of market conditions. Value at risk is used to measure the
exchange rate risk inherent in these derivative financial instru-
ments.
Table  7.83 shows the period-end, high, low and average
value at risk figures for the 2012 and 2011 portfolios of derivative
financial instruments, which were entered into primarily in
connection with the operative vehicle businesses. Average expo-
sure has been computed on an end-of-quarter basis. The
offsetting transactions underlying the derivative financial instru-
ments are not included in the following value at risk presen-
tation. See also table  7.80 for the nominal volumes on the
balance sheet date of derivative currency instruments entered
into to hedge the currency risk from forecasted transactions.
In 2012, the development of the value at risk from foreign cur-
rency hedging was mainly driven by the changes of the nominal
values and foreign currency volatilities.
The Group’s investments in liquid assets or refinancing activities
generally are not allowed to result in currency risk. Transaction
risks arising from liquid assets or payables in foreign currencies
that result from the Group’s investment or refinancing on
money and capital markets are generally hedged against currency
risks at the time of investing or refinancing in accordance
with Daimler’s internal guidelines. The Group uses appropriate
derivative financial instruments (e.g. cross currency interest
rate swaps) to hedge against currency risk.
Since currency risks arising from the Group’s investment
refinancing in foreign currencies and the respective hedging
transactions principally offset each other these financial
instruments are not included in the value at risk calculation
above presented.
Effects of currency translation. For purposes of Daimler’s
consolidated financial statements, the income and expenses
and the assets and liabilities of subsidiaries located outside
the euro zone are converted into euros. Therefore, period-
to-period changes in average exchange rates may cause trans-
lation effects that have a significant impact on, for example,
revenue, segment results (earnings before interest and taxes –
EBIT) and assets and liabilities of the Group. Unlike exchange
rate transaction risk, exchange rate translation risk does not
necessarily affect future cash flows. The Group’s equity position
reflects changes in book values caused by exchange rates.
Daimler does not generally hedge against exchange rate trans-
lation risk.