Mercedes 2013 Annual Report Download - page 250

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Finance market risks
The global nature of its businesses exposes Daimler to signifi-
cant 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 Nissan, Renault, Kamaz
and Tesla). 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 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. 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 quantified.
Based on expected volatilities and correlations of these market
risk factors, which are obtained from the RiskMetrics™ data-
set, 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%.
Oriented towards the risk management standards of the
international banking industry, Daimler maintains its financial
controlling system independent of operating 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 (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 cur-
rency 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 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, 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
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 generally strives to increase cash outflows
in the same currencies in which the Group has a net excess
inflow.