MARKET RISK

General

The Fresenius Group is exposed to effects related to foreign exchange fluctuations in connection with its international business activities that are denominated in various currencies. In order to finance its business operations, the Fresenius Group issues senior notes, trust preferred securities and commer- cial papers and enters into mainly long-term credit agreements and mid-term Euro Notes (Schuld- scheindarlehen) with banks. Due to these financing activities, the Fresenius Group is exposed to interest risk caused by changes in variable interest rates and the risk of changes in the fair value of balance sheet items bearing fixed interest rates.

In order to manage the risks of interest rate and foreign exchange rate fluctuations, the Fresenius Group enters into certain hedging transactions with highly rated financial institutions as authorized by the Management Board. Derivative financial instruments are not used for trading purposes. In general, the Fresenius Group conducts its derivative financial instrument activities under the con- trol of a single centralized department. The Fresenius Group has established guidelines derived from best practice standards in the banking industry for risk assessment procedures and supervision con- cerning the use of financial derivatives. These guidelines require amongst other things a clear segre- gation of duties in the areas of execution, administration, accounting and controlling.

The Fresenius Group defines benchmarks for individual exposures in order to quantify interest and foreign exchange risks. The benchmarks are derived from achievable and reasonable market rates. Depending on the individual benchmarks, hedging strategies are determined and implemented. Earnings of the Fresenius Group were not materially affected by hedge ineffectiveness in the report- ing period since the critical terms of the interest and foreign exchange derivatives mainly matched the critical terms of the underlying exposures.

Notes

Derivative financial instruments

Foreign exchange risk management

The Fresenius Group has determined the euro as its financial reporting currency. Therefore, foreign exchange translation risks resulting from the fluctuation of exchange rates between the euro and the local currencies in which the financial statements of the foreign subsidiaries are prepared have an im- pact on results of operations and financial positions reported in the consolidated financial statements. Besides translation risks, foreign exchange transaction risks exist, which mainly relate to transactions such as purchases and sales as well as engineering and services provided by Fresenius Group which are denominated in foreign currencies. A major part of transaction risks arise from products manu- factured in Fresenius Group’s worldwide production sites which are usually denominated in the local currency of the respective manufacturer and are delivered worldwide to various Fresenius Group entities. These intragroup sales are mainly denominated in euros, USdollars and yens. Therefore, Group companies are exposed to changes of the foreign exchange rates between the invoicing currencies and the local currencies in which they conduct their businesses. For the purpose of hedging existing and foreseeable foreign exchange transaction exposures, the Fresenius Group enters into foreign exchange forward contracts and, on a small scale, foreign exchange options. Foreign exchange forward contracts and options are not used for purposes other than hedging foreign exchange exposures. At December 31, 2007, the Fresenius Group had no foreign exchange options.

As of December 31, 2007, the notional amounts of foreign exchange contracts totaled € 739 million with a fair value of € 14 million. These foreign exchange contracts have been entered into to hedge risks from operational business and in connection with intercompany loans in foreign currency. The predominant part of the foreign exchange forward contracts to hedge risks from operational business was recognized as cash flow hedge.

The hedge-effective portion of changes in the fair value of foreign exchange forward contracts that are designated and qualified as cash flow hedges of forecasted product purchases and sales is reported in accumulated other comprehensive income (loss). These amounts are subsequently reclassified into earnings as a component of cost of sales or as selling, general and administrative expenses as well as interest income or expenses in the same period in which the hedged transaction affects earnings. After-tax gains of € 6 million (€ 8 million pre-tax) for the year ended December 31, 2007 are deferred in accumulated other comprehensive income and will mainly be reclassified into earnings during 2008. During 2007, the Fresenius Group reclassified after-tax unrealized gains of € 1 million (€ 2 million pre-tax) from accumulated other comprehensive income (loss) into the profit and loss statement. As of December 31, 2007, the Fresenius Group was party to foreign exchange contracts with a maxi- mum maturity of 24 months.

In order to estimate and quantify the transaction risks from foreign currencies, the Fresenius Group considers the cash flows reasonably expected for the following three months as the relevant assess- ment basis for a sensitivity analysis. For this analysis, the Fresenius Group assumes that all foreign

Notes

exchange rates in which the Group had unhedged positions as of reporting date would be negatively impacted by 10 %. By multiplying the calculated unhedged risk positions with this factor, the maxi- mum possible negative impact of the foreign exchange transaction risks on the Group’s results of operations would be € 10 million.

Interest rate risk management

Fresenius Group’s interest rate risks mainly arise from money market and capital market transactions of the Group for financing its business activities. Interest rate hedging transactions are primarily concluded by Fresenius SEand FMC-AG & Co. KGaA.

The Fresenius Group enters into interest rate swaps and, on a small scale, into interest rate options in order to hedge against interest rate exposures arising from short-term and long-term borrowings at variable rates by swapping them into fixed rates. In addition, the Fresenius Group uses interest rate swaps to hedge against changes of the fair value of the underlying fixed rate financial liabilities. For purposes of analyzing the impact of changes in the relevant reference interest rates on Fresenius Group’s results of operations, the Group calculates the portion of financial debt which bears variable interest rate and which has not been hedged by means of interest rate swaps or options against rising interest rates, plus the portion of financial debt which bears fixed interest rates and which has been converted into floating rate debt by using interest rate swaps. For this particular part of its liabilities, the Fresenius Group assumes an increase in the reference rates of 0.5 % compared to the actual rates as of the balance sheet date. The corresponding additional annual interest expense is then compared to the Group net income. This analysis shows that an increase of 0.5 % in the relevant reference rates would have an effect of less than 1 % on the Group’s consolidated net income.

Cash Flow Hedge

The Fresenius Group enters into interest rate swaps that are designated as cash flow hedges effectively converting certain variable interest rate payments, resulting from existing revolving loans and Euro Notes (Schuldscheindarlehen) mainly denominated in USdollars or euros, into fixed interest rate payments. The USdollar interest rate swaps with a notional volume of US$3,465 million and a fair value of US$ - 35million expire at various dates between 2008 and 2012. These interest rate derivatives include interest rate swaps with a notional amount of US$650 million entered into in 2007, which will become effective as of March 31, 2008. Until that date, interest rate swaps with a notional amount of

US$515 million will expire. The Euro interest rate swaps with a notional volume of € 217 million and a fair value of € - 2 million expire between 2008 and 2014. The USdollar interest rate swaps bear an average interest rate of 4.43 % and the Euro interest rate swaps bear an average interest rate of 4.56 %. At December 31, 2007, pre-tax losses of € 26 million (2006: pre-tax gains of € 45 million), were recog- nized in accumulated other comprehensive income (loss). The equivalent amounts of after-tax losses and after-tax gains were € 16 million and € 28 million, respectively. Interest payables and interest receivables in connection with the swap agreements are accrued and recorded as an adjustment to the interest expense at each reporting date.

Notes

Fair Value Hedge

Fresenius Medical Care entered into USdollar interest rate swaps designated as fair value hedges to hedge the risk of changes in the fair value of parts of its USdollar fixed rate borrowings. These interest rate swaps effectively convert the fixed interest payments on Fresenius Medical Care Capital Trust II trust preferred securities denominated in USdollars into variable interest rate payments. Since the critical terms of the interest rate swap agreements are identical to the terms of Fresenius Medical Care Capital Trust II trust preferred securities, the hedging relationship is highly effective and no ineffectiveness affects earnings. These interest rate swaps are reported at fair value in the balance sheet. The reported amount of the hedged portion of fixed rate trust preferred securities includes an adjustment representing the change in fair value attributable to the interest rate risk being hedged. The effect of hedged underlyings recognized in the income statement amounted to € - 7 million (2006: € - 3 million) and was mainly offset by the effect of the hedging instruments recognized in the income statement in an amount of € 7 million (2006: € 3 million). At December 31, 2007, the notional volume and fair value of these swaps at Fresenius Medical Care was US$450 million (€ 306 million) and US$- 6 million (€ - 4 million), respectively. On February 1, 2008, the fair value hedges of Fresenius Medical Care expired together with the mandatory redemption of the underlying debt.