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Management’s discussion and analysis 185

Management’s discussion and analysis

Effects of Currency Translation: Many of our subsidiaries are located outside

the euro zone. Since our ﬁ nancial reporting currency is the euro, we translate the

ﬁ nancial statements of these subsidiaries into euros so that we can include their

ﬁ nancial results in our Consolidated Financial Statements. To consider the effects

of foreign exchange translation risk in our risk management, our working

assumption is that investments in our foreign-based operations are permanent

and that reinvestment is continual. Whenever a divestment of a particular asset or

entity is made, we incorporate the value of this transaction risk in our sensitivity

analyses. Effects from currency ﬂ uctuations on the translation of net asset

amounts into euro are reﬂ ected in the Siemens consolidated equity position.

Interest Rate Risk

Our interest rate risk exposure is mainly related to debt obligations like bonds,

loans, commercial paper programs and interest bearing deposits and invest-

ments. We seek to limit this risk through the use of derivative instruments which

allow it to hedge fair value changes by swapping ﬁ xed rates of interest into vari-

able rates of interest. For additional information see “Notes to Consolidated Finan-

cial Statements.”

To optimize our position with regard to interest income and interest expenses

and to minimize the overall ﬁ nancial interest rate risk, Corporate Treasury per-

forms corporate interest rate risk management together with SFS as operating ser-

vice provider. Part of the interest rate risk management concept is a Corporate-

wide interest rate overlay management to match interest periods of our hedges

with intended maturities of assets and liabilities. Where it is not contrary to coun-

try-speciﬁ c regulations, all Groups and afﬁ liated companies generally obtain any

required ﬁ nancing through Corporate Treasury in the form of loans or intercom-

pany clearing accounts. The same concept is adopted for deposits of cash gener-

ated by the units.

September 30, 2006*

USD GBP Other Total

Gross balance sheet exposure 2,210 332 553 3,095

Thereof: Financial assets 13,778 3,483 5,522 22,783

Thereof: Financial liabilities (11,568) (3,151) (4,969) (19,688)

Gross exposure from ﬁ rm commitments

and anticipated transactions 5,344 (65) 279 5,558

Foreign exchange transaction exposure 7,554 267 832 8,653

Economically hedged exposure (7,291) (409) (576) (8,276)

Change in future cash ﬂ ows after hedging activities

resulting from a 10% appreciation of the Euro (26) 14 (26) (38)

* Including SV.