Siemens 2005 Annual Report Download - page 128

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The managing of financial market risk is part of Siemens’ overall risk management system,
which at the highest level involves our Managing Board which oversees all of our operations. Our
CFO is a member of the Managing Board and has the specific responsibility for our financial mar-
ket risk management. The Managing Board retains ultimate accountability but for practical busi-
ness purposes delegates responsibilities to central functions and to the business Groups.
Siemens uses the “sensitivity analysis” method to present our financial market risk. Sensitivity
analysis is a widely used risk measurement tool that enables management to make judgments
regarding the risk positioning of the company as a whole. Sensitivity analysis provides an approx-
imate quantification of our exposure in the event that certain specified parameters were to be
met under a specific set of assumptions. The risk estimates provided here assume:
■a 20% decrease in equity prices of all our investments in marketable securities;
■a simultaneous, parallel foreign exchange rates shift in which the euro appreciates against all
currencies by 10%; and
■a parallel shift of 100 basis points of the interest rate yield curves in all currencies.
These potential economic impacts are based on the occurrence of adverse market conditions
and reflect estimated changes resulting from our sensitivity analysis. Actual results that are
included in our statement of income may differ materially from these estimates due to actual
developments in the global financial market.
Equity price risk
We have direct and indirect investments in publicly traded companies, which are held for purpos-
es other than trading. The market value of these investments as of September 30, 2005 was €1.841
billion, with our 18.2% interest in Infineon, our 12.5% interest in Epcos and our 4.1% interest in
Juniper representing a significant portion of such investments. An adverse move in equity prices
of 20% as of September 30, 2005 would reduce the value of these investments by €368 million.
The decrease from a hypothetical reduction of €444 million as of September 30, 2004 is primarily
due to the partial divestiture of Juniper shares.
Foreign currency exchange rate risk
Transaction risk and currency management
As a company doing business around the world, Siemens is exposed to foreign currency cash
flows from the sale and purchase of products and services which may not be denominated in the
functional currency of the respective Siemens unit. The operative foreign currency exposure
arising from our operating units is partly offset through our production facilities abroad, as well
as through procurement activities conducted in foreign currencies. In addition, a financial for-
eign currency exposure arises from investments and financing activities of Siemens as a whole in
foreign currencies.
We define foreign currency exposure generally as balance sheet items and firm commitments
which are denominated in foreign currencies, as well as foreign currency denominated cash in-
flows and cash out-flows from anticipated transactions for the next three months. This foreign
currency exposure is determined based on the respective functional currencies of the exposed
Siemens’ entity. Operating units are prohibited from borrowing or investing in foreign curren-
cies on a speculative basis. Intercompany financing or investments of operating units are prefer-
ably done in their functional currency or on a hedged basis.
Management’s discussion and analysis
Risk management