Siemens 2006 Annual Report Download - page 145

Management’s discussion and analysis 141
The potential economic impact, due to these assumptions, is based on the occurrence of
adverse market conditions and reflects 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.
At the beginning of fiscal year 2006, Siemens includes the leasing business in the risk
analysis and calculation.
Any market sensitive instruments, including equity and interest bearing securities, that
our pension plans hold are not included in the following quantitative and qualitative disclo-
sure. For additional information, see “Notes to Consolidated Financial Statements.”
Equity price risk
Our investment portfolio consists of direct and indirect investments in publicly traded com-
panies held for purposes other than trading. These participations result from strategic part-
nerships, spin-offs, IPOs of strategic venture capital investments or compensation from M&A
transactions.
We monitor the equity investments based on their current market value and they are
affected by the fluctuations in the volatile stock markets worldwide. The market value of our
portfolio as of September 30, 2006 was €216 million – a reduction of – €1.625 billion compared
to September 30, 2005. In 2005, this position included an 18.2% interest in Infineon, a 12.5%
interest in Epcos and a 4.1% interest in Juniper Networks representing a combined value of
€1.655 billion of the total investments. We sold these investments in the course of the fiscal
year 2006.
An adverse move in equity prices of 20% as of September 30, 2006 would reduce the value
of these investments by €43 million, meaning that the equity price risk has decreased signifi-
cantly year-over-year. As of September 30, 2005 the value would have been reduced by €368
million.
Foreign currency exchange rate risk
Transaction risk and currency management
Foreign exchange rate fluctuations may create unwanted and unpredictable earnings and cash
flow volatility. Each Siemens unit conducting business with international counterparties that
leads to future cash flows denominated in a currency, other than its functional currency, is
exposed to the risk from changes in foreign exchange rates. The risk is mitigated by closing all
types of business transactions (sales and procurement of products and services as well as
investment and financing activities) mainly in the functional currency. In addition, the for-
eign currency exposure is partly balanced by purchasing of goods, commodities and services
in the respective currencies as well as production activities and other contributions along the
value chain in the local markets.
Operating units are prohibited from borrowing or investing in foreign currencies on a
speculative basis. Intercompany financing or investments of operating units are preferably
done in their functional currency or on a hedged basis.
Management’s discussion and analysis