Siemens 2007 Annual Report Download - page 297

Notes to Consolidated Financial Statements 297
(in millions of €, except where otherwise stated and per share amounts)
Notes to Consolidated Financial Statements
Interest rate risk
Siemens’ interest rate risk exposure is mainly related to debt obligations like
bonds, loans, commercial paper programs and interest-bearing deposits and
investments. Siemens seeks to limit this risk through the use of derivative instru-
ments which allow it to hedge fair value changes by swapping fi xed rates of inter-
est into variable rates of interest (for additional information see Note 31).
To optimize the Company’s position with regard to interest income and inter-
est expenses and to minimize the overall fi nancial interest rate risk, Corporate
Treasury performs corporate interest rate risk management together with SFS as
operating service provider. Part of the interest rate risk management concept is a
Corporate-wide interest rate overlay management to match interest periods of
hedges with intended maturities of assets and liabilities. Where it is not contrary
to country-specifi c regulations, all Groups and affi liated companies generally
obtain any required fi nancing through Corporate Treasury in the form of loans or
intercompany clearing accounts. The same concept is adopted for deposits of cash
generated by the units.
Interest rate risk is measured by using either fair value sensitivity or cash fl ow
sensitivity depending on whether the instrument has a fi xed or variable interest
rate. The total fair value sensitivity as well as the total cash fl ow sensitivity is gen-
erated by aggregating the sensitivities of the various exposures denominated in
different currencies. Depending on whether Siemens has a long or short interest
rate position, interest rate risk can arise on increasing or decreasing market
moves in the relevant yield curve.
The fair value sensitivity calculation for fi xed interest rate instruments shows
the change in fair value, defi ned as present value, caused by a hypothetical
100-basis point shift in the yield curve. The fi rst step in this calculation is to use
the yield curve to discount the gross cash fl ows, meaning the present value of
future interest and principal payments of fi nancial instruments with fi xed inter-
est rates. A second calculation discounts the gross cash fl ows using a 100-basis
point shift of the yield curve. In all cases, Siemens uses the generally accepted and
published yield curves on the relevant balance sheet date. The fair value interest
rate risk results primarily from long-term fi xed rate debt obligations and interest-
bearing investments. Assuming a 100-basis point increase in interest rates, this
risk was €40 as of September 30, 2007, increasing from the comparable value of
€24 as of September 30, 2006, assuming a 100-basis point decrease.
For variable-rate instruments, the interest rate risk is monitored by using the
cash fl ow sensitivity also assuming a 100-basis point shift of the yield curves.
Such risk mainly results from hedges of fi xed-rate debt obligations that swap
fi xed-rates of interest into variable-rates of interest. This exposure leads to a cash
fl ow interest rate risk of €72 as of September 30, 2007, compared to €32 as of Sep-
tember 30, 2006, assuming a 100-basis point increase in interest rates.