Siemens 2011 Annual Report Download - page 333

153 D. Consolidated Financial Statements 273 E. Additional information
158 D. Consolidated Statements of Changes in Equity
160 D. Notes to Consolidated Financial Statements
266 D. Supervisory Board and Managing Board
154 D. Consolidated Statements of Income
155 D.2 Consolidated Statements of Comprehensive Income
156 D. Consolidated Statements of Financial Position
157 D. Consolidated Statements of Cash Flow

during prolonged periods of severe market illiquidity. A .%
confidence level does not reflect losses that may occur be-
yond this level. There is a .% statistical probability that loss-
es could exceed the calculated VaR. The use of historical data
as a basis for estimating the statistic behavior of the relevant
markets and finally determining the possible range of the fu-
ture outcomes on the basis of this statistic behavior may not
always cover all possible scenarios, especially those of an ex-
ceptional nature.
Any market sensitive instruments, including equity and inter-
est bearing investments, that our Company ’s pension plans
hold are not included in the following quantitative and quali-
tative disclosures. For additional information see
Note 24
Pension plans and similar commitments. SFS holds a minor
trading portfolio which is subject to strict limits. As of Septem-
ber , , and , respectively, it had a VaR close to zero.
Foreign currency exchange rate risk
Transaction risk and foreign currency
exchange rate risk management
Siemens’ international operations expose the Company to for-
eign currency exchange rate risks, particularly regarding fluc-
tuations between the U.S. dollar and the euro, in the ordinary
course of business. The Company employs various strategies
discussed below involving the use of derivative financial in-
struments to mitigate or eliminate certain of those exposures.
Foreign currency exchange rate fluctuations may create un-
wanted and unpredictable earnings and cash flow volatility.
Each Siemens unit conducting business with international
counterparties that leads to future cash flows denominated in
a currency other than its functional currency is exposed to
risks from changes in foreign currency exchange rates. For-
eign currency exchange rate exposure is partly balanced by
purchasing of goods, commodities and services in the respec-
tive currencies as well as production activities and other con-
tributions along the value chain in the local markets.
Operating units are prohibited from borrowing or investing in
foreign currencies on a speculative basis. Intercompany fi-
nancing or investments of operating units are preferably car-
ried out in their functional currency or on a hedged basis.
Siemens has established a foreign currency exchange rate risk
management system that has an established track record for
years. Each Siemens unit is responsible for recording, assess-
ing, monitoring, reporting and hedging its foreign currency
transaction exposure. The binding guideline for Siemens’ Divi-
sions and entities provides the concept for the identification
and determination of a single net foreign currency position
for each unit and commits the units to hedge this aggregated
position within a narrow band of at least % but no more
than % of their net foreign currency position. In addition,
the guideline provides a framework of the organizational
structure necessary for foreign currency exchange rate risk
management, proposes hedging strategies and defines the
hedging instruments available to the entities: foreign curren-
cy exchange contracts, foreign currency put and call options
and stop-loss orders. If there are no conflicting country specif-
ic regulations, hedging activities of the operating units are
transacted internally with Corporate Treasury. Hedging trans-
actions with external counterparties in the global financial
markets are carried out under these limitations by Corporate
Treasury. This includes hedging instruments which qualify for
hedge accounting.
Siemens has a Company-wide portfolio approach which gen-
erates a benefit from any potential off-set of divergent cash
flows in the same currency, as well as optimized transaction
costs. For additional information regarding the effect of this
Company-wide portfolio approach on the Consolidated Finan-
cial Statements, as well as for a discussion of hedging activi-
ties employed to mitigate or eliminate foreign currency ex-
change rate risks see
Note 32 Derivative financial instru-
ments and hedging activities.
The VaR relating to foreign currency exchange rates is calcu-
lated by aggregating the net foreign currency positions after
hedging of the entities. As of September ,  the foreign
currency exchange rate risk based on historical volatilities
and correlations, a ten day holding period and a confidence
level of .% resulted in a VaR of € million compared to a
VaR of € million in the year before. The prior-year amount
has been adjusted in order to take into consideration the mod-
ified principles with regard to foreign currency exchange rate
risk management. Changes in euro values of future cash flows
denominated in foreign currency due to volatile foreign cur-
rency exchange rates might influence the unhedged portion
of revenues, but would also affect the unhedged portion of
cost of materials. Future changes in the foreign currency ex-
change rates can impact sales prices and may lead to margin
changes, the extent of which is determined by the matching
of foreign currency revenues and expenses.