Siemens 2010 Annual Report Download - page 288

6 To our shareholders 21 Corporate Governance 49 Combined management’s discussion and analysis
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Commodity price risk
Siemens’ production operations expose the Company to vari-
ous commodity price risks in the ordinary course of business.
Especially in the Industry and Energy Sector a continuous sup-
ply of copper is necessary for the operating activities. Com-
modity price risk fluctuations may create unwanted and unpre-
dictable earnings and cash flow volatility. The Company em-
ploys various strategies discussed below involving the use of
derivative financial instruments to mitigate or eliminate cer-
tain of those exposures.
Siemens has established a commodity price risk management
system to reduce earnings and cash flow volatility. Each
Siemens unit is responsible for recording, assessing, monitor-
ing, reporting and hedging its risks from forecasted and pend-
ing commodity purchase transactions (commodity price risk
exposure). The binding guideline for Siemens Divisions and
entities developed by the Corporate Supply Chain Management
department provides the concept for the identification and
determination of the commodity price risk exposure and com-
mits the units to hedge it in a narrow band:  percent –  per-
cent of the commodity price risk exposure in the product
business for the current and the subsequent quarter and
 percent –  percent of the commodity price risk exposure
in the project business after receipt of order.
The aggregated commodity price risk exposure is hedged with
external counterparties through derivative financial hedging
instruments by Corporate Treasury. Financial hedging instru-
ments designated for hedge accounting are directly entered
into with external counterparties. Additionally, Siemens has a
Company-wide portfolio approach which generates a benefit
from optimizing the Company ’s position of the overall finan-
cial commodity price risk. For additional information relating
to the effect of this Company-wide portfolio approach on the
Consolidated Financial Statements, as well as for a discussion
of hedging activities employed to mitigate or reduce commod-
ity price risks, see Note .
Using historical volatilities and correlations, a ten day holding
period and a confidence level of . percent, the VaR for com-
modity derivatives was € as of September , , decreas-
ing from the comparable value of € as of September ,
. However, the economic VaR, which comprises the net
position of commodity derivates and the commodity purchase
transactions with price risk, was € as of September , .
Equity price risk
Siemens’ investment portfolio consists of direct and indirect
investments in publicly traded companies held for purposes
other than trading. These participations result mainly from
strategic partnerships or compensation from M&A-transac-
tions; indirect investments are mainly transacted for financial
reasons.
The equity investments are monitored based on their current
market value, affected primarily by the fluctuations in the
volatile technology-related markets worldwide. The market
value of Siemens’ portfolio in publicly traded companies as of
September ,  was € compared to € as of Septem-
ber , .
Based on historical volatilities and correlations, a ten day hold-
ing period and a confidence level of . percent, the VaR as of
September ,  of Siemens’ equity investments was €
compared to € the year before, meaning that the equity price
risk has decreased over the last year.
Liquidity risk
Liquidity risk results from the Company ’s potential inability to
meet its financial liabilities, e.g. for the settlement of its finan-
cial debt or for ongoing cash requirements from operating ac-
tivities. Beyond effective working capital and cash manage-
ment, Siemens mitigates liquidity risk by arranged borrowing
facilities with highly rated financial institutions, via a medium-
term notes program and via an established global commercial
paper program. For further information on short- and long-
term debt see Note .
In addition to the above mentioned sources of liquidity,
Siemens constantly monitors funding options available in the
capital markets, as well as trends in the availability and costs
of such funding, with a view to maintaining financial flexibility
and limiting repayment risks.
The following table reflects all contractually fixed pay-offs for
settlement, repayments and interest resulting from recognized
financial liabilities. It includes expected net cash outflows from
derivative financial liabilities which are in place as per Septem-
ber , . Such expected net cash outflows are determined
based on each particular settlement date of an instrument. The
amounts disclosed are undiscounted net cash outflows for the
respective upcoming fiscal years, based on the earliest date on
which Siemens could be required to pay. Cash outflows for fi-