The DaimlerChrysler Group is exposed to market risks from changes in foreign currency exchange rates, interest rates and equity prices. Furthermore, commodity price risks arise from procurement. These market risks may adversely affect DaimlerChrysler’s financial position, cash flow, and profitability. The Group seeks to manage and control these risks primarily through its regular operating and financing activities, and, if appropriate, through the use of derivative financial instruments. Additional information on financial instruments and derivatives can be found in Note 32 of the Notes to the Consolidated Financial Statements. Daimler- Chrysler evaluates these market risks by continually monitoring changes in key economic indicators and market information. To quantify the Group’s exchange rate risk, interest rate risk and equity price risk on a continuous basis, DaimlerChrysler’s risk management systems employ value-at-risk analyses as recommended by the Bank for International Settlements. The value-at-risk calculations employed by DaimlerChrysler express potential losses in fair values assuming a 99% confidence level and a holding period of five days. This method is based on the variance-covariance approach of the RiskMetrics™ model. Estimates of volatilities and correlations are drawn from the RiskMetrics™ datasets and are supplemented by additional information on exchange rates, interest rates and equity prices. The DaimlerChrysler Group does not use derivative financial instruments for speculative purposes.
Any market-sensitive instruments, including equity and fixed interest bearing securities, that pension and other post-retirement benefit plans hold are not included in this quantitative and qualitative analysis. Please refer to Note 24a of the Notes to the Consolidated Financial Statements for additional information regarding the Group’s pension plans.
In accordance with the organizational standards in the international banking industry, DaimlerChrysler maintains a financial risk controlling system independent of Corporate Treasury.
Exchange rate risks. The global nature of DaimlerChrysler’s
business activities results in cash receipts and payments deno- minated in various currencies. For the assessment of currency exposures, the cash inflows and outflows of the business segments are offset and netted out if they are denominated in the same currency. Currency exposures are regularly assessed and gradually hedged with suitable financial instruments, predominantly foreign exchange forwards and currency options, according to exchange rate expectations, which are constantly reviewed. The net assets of the Group which are invested in subsidiaries outside the euro zone are generally not hedged against currency risks. Besides this, DaimlerChrysler generally does not hedge the currency translation risks that arise from our subsidiaries that report their revenues and results in a functional currency other than the euro.
The following table shows value-at-risk figures for DaimlerChrysler’s 2006 and 2005 portfolios of derivative financial instruments used to hedge the underlying currency exposure. We have computed the average exposure based on an end-of-quarter basis.
The average value at risk of our derivative financial instruments used to hedge exchange rate risks in 2006 is comparable to that of 2005. The decrease in the period-end value at risk is primarily a result of lower exchange-rate volatilities.
Value at risk 253 281 261 208 Average for 2005 Dec. 31, 2005 Average for 2006 Dec. 31, 2006 Amounts in millions of € Exchange-rate-sensitive financial instruments1
Due to exchange rate fluctuations, especially of the US dollar and other major currencies against the euro, DaimlerChrysler is exposed to exchange rate risks and resultant transaction risks. These transaction risks primarily affect the Mercedes Car Group division, as a significant portion of its revenues are generated in foreign currencies while most of its costs are incurred in euros. The Truck Group division is also exposed to such transaction risks, but only to a minor degree because of its worldwide production network. The Chrysler Group’s transaction risks are low, as most of its revenues and costs are generated in US dollars.
Interest rate risks. DaimlerChrysler holds a variety of interest rate
sensitive financial instruments to manage its liquidity and the cash needs of the day-to-day operations. A substantial volume of interest rate sensitive assets and liabilities is related to the leasing and sales financing business operated by DaimlerChrysler Financial Services. The leasing and sales financing business enters into transactions with customers which primarily result in fixed-rate receivables. DaimlerChrysler’s general policy is to match funding in terms of maturities and interest rates. However, for a limited portion of the receivables portfolio, the funding does not match in terms of maturities and interest rates. As a result, DaimlerChrysler is exposed to risks due to changes in interest rates.
DaimlerChrysler coordinates the funding activities of the Industrial Business and Financial Services at the Group level. It uses interest rate derivative instruments, such as interest rate swaps, forward rate agreements, swaptions, caps and floors, to achieve the desired interest rate maturities and asset/liability structures (asset and liability management).
The following table shows value-at-risk figures for DaimlerChrysler’s 2006 and 2005 portfolios of interest rate sensitive financial instruments. We have computed the average exposure based on an end-of-quarter basis.
In 2006, the average and the period-end values at risk of our portfolio of interest-rate-sensitive financial instruments decreased, primarily as a result of lower interest-rate volatilities and a reduction in risk positions.
Equity price risks. DaimlerChrysler holds investments in marke-
table equity securities and equity derivatives. In accordance with international banking standards, DaimlerChrysler does not include investments in marketable equity securities that the Group classifies as long-term investments in the equity price risk assessment. Equity derivatives used to hedge the market price risk of investments accounted for using the equity method are also not included in this assessment. Changes in the fair market value of these derivatives essentially offset changes in the fair market value of the underlying investment. The remaining equity price risk in 2006 and 2005 was not, and is currently not, material to the Group. For this reason, DaimlerChrysler does not present the value-at-risk figures for the remaining equity price risk. Value at risk 90 89 48 32 Average for 2005 Dec. 31, 2005 Average for 2006 Dec. 31, 2006 Amounts in millions of € Interest-rate-sensitive financial instruments
Commodity price risks. Associated with DaimlerChrysler’s
business operations, the Group is exposed to changes in prices of commodities. DaimlerChrysler addresses these procurement risks by means of a concerted commodity and supplier risk management. To a minor extent, DaimlerChrysler uses derivative commodity instruments to reduce some of the Group’s commodity price risks, primarily the risk associated with the purchase of precious metals. The risk resulting from these derivative commodity instruments in 2006 and 2005 was not, and is currently not, significant to the Group. Therefore, DaimlerChrysler does not separately present the value-at-risk figures for its derivative commodity instruments.
Ratings
The rating agencies Standard & Poor’s, Moody’s Investors Service, Fitch Ratings and Dominion Bond Rating Service assess the creditworthiness of DaimlerChrysler. Downgrades of the ratings provided by these agencies could have a negative impact on the Group’s cost of capital.