Siemens 2008 Annual Report Download - page 199

Management’s discussion and analysis 103
Financial risks
Market
We are particularly exposed to uctuations in the exchange rate between the U.S. dollar and the euro, because
a high percentage of our business volume is conducted in the United States and as exports from Europe. As
a result, a strong euro in relation to the U.S. dollar can have a material impact on our other revenues and results.
Certain currency risks – as well as interest rate risks – are hedged on a company-wide basis using derivative
nancial instruments. Depending on the development of foreign currency exchange rates, our hedging activities
can have signicant effects on our cash ow, particularly for our treasury activities (Corporate Treasury). Our
Sectors and Cross-Sector Businesses engage in currency hedging activities which sometimes do not qualify for
hedge accounting. In addition, our Corporate Treasury has interest rate hedging activities which also do not
qualify for hedge accounting, and are subject to changes in interest rates. Accordingly, exchange rate and inter-
est rate uctuations may inuence our nancial results and lead to earnings volatility. A strengthening of the
euro (particularly against the U.S. dollar) may also change our competitive position, as many of our competitors
may benet from having a substantial portion of their costs based in weaker currencies, enabling them to offer
their products at lower prices. For more details regarding currency risks, interest rate risks, hedging activities
and other market risks, please see “Notes to Consolidated Financial Statements.”
Regarding our Corporate Treasury activities, widening credit spreads due to decreasing liquidity in the nancial
markets might lead to decreasing fair market values of our existing derivative nancial instruments and traded
receivables. In addition, we also see a risk of increasing renancing costs if the turbulences in the global nan-
cial markets would persist. Furthermore, costs for buying protection on credit default risks could increase due
to a potential increase of counterparty risks.
Liquidity and credit
Our Corporate Treasury is responsible for the nancing of the Company and our Sectors and Cross-Sector Busi-
nesses. A negative development in the capital markets could increase our cost of debt capital. The development
in the subprime mortgage market in the U.S. has had a global impact on the capital markets with subsequent
losses and worsening liquidity of many nancial institutions, so far culminating in the Chapter 11 ling of
a large U.S.-based investment bank. Such developments could inuence our possibilities of obtaining debt
nancing. Regarding our Corporate Treasury activities, deteriorating credit quality and/or default of counter-
parties may adversely affect our results.
We provide to our customers various forms of direct and indirect nancing in connection with large projects
such as those undertaken by the Energy Sector. We nance a large number of smaller customer orders, for
example the leasing of medical equipment, in part, through Siemens Financial Services (SFS). SFS also incurs
credit risk by nancing third-party equipment, its factoring business or by taking direct or indirect participa-
tions in nancings, such as syndicated loans. We partially take a security interest in the assets we nance or
receive additional collateral. We may lose money if the credit quality of our customers deteriorates or if they
default on their payment obligation to us, if the value of the assets that we have taken a security interest in or
additional collateral declines, if interest rates or foreign exchange rates uctuate, or if the projects in which we
invest are unsuccessful. The current nancial crisis and potential adverse changes in economic conditions could
cause a decline in the fair market values of nancial assets and customer default rates to increase substantially
and asset and collateral values to decline, resulting in losses which could have a negative effect on our nancial
condition or results of operations.