Siemens 2011 Annual Report Download - page 334

6 A. To our shareholders 51 C. Combined management’s discussion and analysis 23 B. Corporate Governance
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Siemens defines foreign currency exchange rate exposure
generally as items of the Consolidated Statement of Financial
Position in addition to firm commitments which are denomi-
nated in foreign currencies, as well as foreign currency de-
nominated cash inflows and cash outflows from forecast
transactions for the following three months. This foreign cur-
rency exchange rate exposure is determined based on the re-
spective functional currencies of the exposed Siemens’ enti-
ties.
Effects of foreign currency translation
Many Siemens subsidiaries are located outside the eurozone.
Since the financial reporting currency of Siemens is the euro,
the financial statements of these subsidiaries are translated
into euro for the preparation of the Consolidated Financial
Statements of Siemens. To consider the effects of foreign cur-
rency translation in the risk management, the general as-
sumption is that investments in foreign-based operations are
permanent and that reinvestment is continuous. Effects from
foreign currency exchange rate fluctuations on the translation
of net asset amounts into euro are reflected in the Company ’s
consolidated equity position.
Interest rate risk
Siemens’ interest rate risk exposure is mainly related to debt
obligations like bonds, loans, commercial paper and interest-
bearing deposits and investments. Siemens manages this risk
using derivative financial instruments which allow the Com-
pany to hedge fair value changes by swapping fixed rates of
interest into variable rates of interest. In order to optimize the
Company ’s position with regard to interest income and inter-
est expenses and to manage the overall financial interest rate
risk with respect to valuation risk affecting profit and loss and
economic risk of changing interest rates, Corporate Treasury
performs a comprehensive corporate interest rate risk man-
agement, under which the interest rate risk relating to the SFS
business and to the remaining group are managed separately.
For additional information see
Note 32 Derivative financial
instruments and hedging activities.
If there are no conflicting country-specific regulations, all
Siemens segments and entities generally obtain any required
financing 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.
Assuming historical volatilities and correlations, a ten day
holding period and a confidence level of .% the interest
rate VaR was € million as of September , , decreasing
from the comparable value of € million as of September
, . This interest rate risk results primarily from euro and
U.S. dollar denominated long-term fixed rate debt obligations
and interest-bearing investments. The decrease of VaR re-
flects primarily a reduced interest rate risk relating to euro in
connection with outstanding debt obligations and invest-
ments as well as derivative financial instruments used to
manage and optimize the Company ’s interest rate risk. For ad-
ditional information see
Note 32 Derivative financial instru-
ments and hedging activities.
Commodity price risk
Siemens’ production operations expose the Company to vari-
ous commodity price risks in the ordinary course of business.
Especially in the Sectors Industry and Energy a continuous
supply of copper was necessary for the operating activities.
Commodity price risk fluctuations may create unwanted and
unpredictable earnings and cash flow volatility. The Company
employs various strategies discussed below involving the use
of derivative financial instruments to mitigate or eliminate
certain 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 forecast and pending
commodity purchase transactions (commodity price risk ex-
posure). The binding guideline for Siemens Divisions and en-
tities 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 within a narrow band of % to %
of the commodity price risk exposure in the product business
for the current and the subsequent quarter and % to %
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. Derivative finan-
cial hedging instruments designated for hedge accounting
are directly entered into with external counterparties. Addi-
tionally, Siemens applies a Company-wide portfolio approach
which generates a benefit from optimizing the Company ’s po-
sition of the overall financial commodity price risk. For addi-
tional information regarding the effect of this Company-wide
portfolio approach on the Consolidated Financial Statements,