Siemens 2006 Annual Report Download - page 146

Management’s discussion and analysis
142
We have established a foreign exchange risk management system that has an established
track record for years. Each Siemens unit is responsible for recording, assessing, monitoring,
reporting and hedging its foreign currency transaction exposure. The Group-wide binding
guideline developed by the Corporate Finance department, provides the concept for the identi-
fication and determination of the single net currency position and commits the units to hedge
it in a narrow band: at least 75% but no more than 100% of their net foreign currency expo-
sure. In addition, the Corporate Finance department provides a framework of the organiza-
tional structure necessary for foreign currency exchange management, proposes hedging
strategies and defines the hedging instruments available to the entities: forward contracts,
currency put and call options and stop-loss orders. The execution of the hedging transactions
in the global financial markets is done by SFS as exclusive service provider for all Siemens
entities on behalf of Corporate Treasury. SFS’ central coordination and its global market
expertise assure the maximum benefit from any potential off-set of divergent cash-flows in
the same currency, as well as optimized transaction costs.
We calculate foreign exchange rate sensitivity by aggregating the net foreign exchange rate
exposure of the Operations, Financing and Real Estate Groups and Corporate Treasury. The
values and risks disclosed here are the unhedged positions multiplied by an assumed 10%
appreciation of the euro against all other currencies. At September 30, 2006, a parallel 10%
negative shift of all foreign currencies would have resulted in a decline of €38 million in
future cash flows compared to a decline of €35 million the year before. Such decline in euro
values of future cash flows might reduce the unhedged portion of revenues but would also
decrease the unhedged portion of cost of materials. Because our foreign currency inflows
exceed our outflows, an appreciation of the euro against foreign currencies, would have a neg-
ative financial impact to the extent that future sales are not already hedged. Future changes in
the foreign exchange rates can impact sales prices and may lead to margin changes, the extent
of which is determined by the matching of foreign currency revenues and expenses. In partic-
ular, changes of U.S. dollar versus the euro could have a significant impact: Out of the €38 mil-
lion cash flow reduction calculated in the sensitivity scenario above, a net decline of €26 mil-
lion results from the U.S. dollar exposure.
Siemens defines foreign currency exposure generally as balance sheet items in addition
to firm commitments which are denominated in foreign currencies, as well as foreign curren-
cy denominated cash in-flows and cash out-flows from anticipated transactions for the follow-
ing three months. This foreign currency exposure is determined based on the respective func-
tional currencies of the exposed Siemens’ entity.
The table below shows the split by major currencies of the underlying net foreign exchange
transaction exposure as of September 30, 2006 compared to 2005. In some currencies, Siemens
has both substantial sales and costs, which have been off-set in the table:
USD GBP Other
Net foreign exchange transaction exposure
as a percentage of the total
September 30, 2006 82% 3% 15%
September 30, 2005 78% 12% 10%