Siemens 2007 Annual Report Download - page 183

Management’s discussion and analysis 183
Management’s discussion and analysis
Equity Price Risk
Our investment portfolio consists of direct and indirect investments in publicly
traded companies held for purposes other than trading. These participations
result from strategic partnerships, 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 fl uctuations in the volatile stock markets worldwide. The
market value of our portfolio as of September 30, 2007 was €197 million – a reduc-
tion of – €19 million compared to September 30, 2006.
An adverse move in equity prices of 20% as of September 30, 2007 would
reduce the value of these investments by €39 million compared to €43 million the
year before, meaning that the equity price risk has slightly decreased over the last
year.
Foreign Currency Exchange Rate Risk
Transaction Risk and Currency Management: Our international operations expose
us to foreign-currency exchange risks in the ordinary course of business. We
employ various strategies discussed below involving the use of derivative fi nan-
cial instruments to mitigate or eliminate certain of those exposures.
Foreign exchange rate fl uctuations may create unwanted and unpredictable
earnings and cash fl ow volatility. Each Siemens unit conducting business with
international counterparties that leads to future cash fl ows denominated in a cur-
rency other than its functional currency is exposed to the risk from changes in
foreign exchange rates (for further information see “Notes to Consolidated Finan-
cial Statements”). The risk is mitigated by closing all types of business transac-
tions (sales and procurement of products and services as well as investment and
fi nancing activities) mainly in the functional currency. In addition, the foreign
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 curren-
cies on a speculative basis. Intercompany fi nancing or investments of operating
units are preferably done in their functional currency or on a hedged basis.
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 identifi cation 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 exposure. In
addition, the Corporate Finance department provides a framework of the organi-
zational structure necessary for foreign currency exchange management, pro-
poses hedging strategies and defi nes the hedging instruments available to the
entities: forward contracts, currency put and call options and stop-loss orders.