Siemens 2005 Annual Report Download - page 130

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Interest rate exposure
Our interest rate exposure results mainly from debt obligations and interest bearing invest-
ments. We measure interest rate risk using either fair value sensitivity or cash flow sensitivity
depending on whether the instrument has a fixed or variable interest rate. We use the fair value
sensitivity calculation for fixed interest instruments to show the change in the fair value (defined
as net present value) caused by a hypothetical 100-basis point shift in the yield curve. The first
step in this calculation is to use the yield curve to discount the gross cash flows, meaning the net
present value of future interest and principal payments of financial instruments with fixed inter-
est rates. A second calculation discounts the gross cash flows using a 100-basis point shift of the
yield curve. In all cases, we use the generally accepted and published yield curves on the relevant
balance sheet date. The cash flow sensitivity shows the change in future cash flows of financial
instruments with a variable interest rate also assuming a 100-basis point shift of the yield curves.
The total fair value sensitivity, as well as the total cash flow sensitivity is generated by aggregating
the sensitivities of the exposure denominated in various currencies. Depending on whether we
have a long or short interest position in fixed or variable interest rates, interest rate risk can arise
on increasing or decreasing market moves in the yield curve.
Our fair value interest rate risk results primarily from our long-term fixed rate debt obliga-
tions and interest bearing investments. We seek to limit this risk through the use of derivative
instruments which allow us to hedge fair value changes by swapping fixed rates of interest into
variable rates of interest. Assuming a 100-basis point decrease in interest rates, this risk was
€168 million at September 30, 2005, increasing from €106 million at September 30, 2004, assum-
ing a 100 basis point increase. This increase was mainly attributable to altering the refinancing
strategy from variable to fixed interest rate positions.
Our cash flow interest rate risk on our variable interest rate portfolio was €2 million at Sep-
tember 30, 2005 and €47 million at September 30, 2004 assuming a 100-basis point increase in
interest rates. Such risk is largely related to variable interest rates resulting from the aforemen-
tioned hedges of fixed rate debt obligations. Higher interest payments would result in a higher
interest expense.
In order to minimize our overall financial interest rate risk, Corporate Treasury performs cor-
porate wide interest overlay management to match interest periods of our hedges with intended
maturities of assets and liabilities.
Management’s discussion and analysis
Risk management
Accounting under International Financial Reporting
Standards (IFRS)