Siemens 2013 Annual Report Download - page 318

92 A. To our Shareholders 117 B. Corporate Governance 155 C. Combined Management Report

nized in line item Cost of sales. As of September ,  and
, the maximum length of time over which the Company is
hedging its future commodity purchases is  months and 
months, respectively.
NOTE  Financial risk management
Siemens’ financial risk management is an integral part of how
to plan and execute its business strategies. Siemens’ financial
risk management policy is set by the Managing Board.
Siemens’ organizational and accountability structure requires
each of the respective managements of Siemens Sectors, Fi-
nancial Services, Cross-Sector Services, regions and Corporate
Units to implement financial risk management programs that
are tailored to their specific industries and responsibilities,
while being consistent with the overall policy established by
the Managing Board.
Increasing market fluctuations may result in significant cash
flow and earnings volatility risk for Siemens. The Company ’s
operating business as well as its investment and financing ac-
tivities are affected by changes in foreign exchange rates, in-
terest rates, commodity prices and equity prices. In order to
optimize the allocation of the financial resources across the
Siemens segments and entities, as well as to secure an optimal
return for its shareholders, Siemens identifies, analyzes and
proactively manages the associated financial market risks. The
Company seeks to manage and control these risks primarily
through its regular operating and financing activities, and uses
derivative financial instruments when deemed appropriate.
Within the various methodologies to analyze and manage risk,
Siemens has implemented a system based on parametric vari-
ance-covariance Value at Risk (VaR). The VaR methodology pro-
vides a quantification of market risks based on historical vola-
tilities and correlations of the different risk factors under the
assumptions of the parametric variance-covariance Value at
Risk model. The VaR figures are calculated based on
> historical volatilities and correlations,
> a ten day holding period, and
> a .% confidence level
for foreign currency exchange rate risk, interest rate risk, com-
modity price risk and equity price risk as discussed below.
Actual results that are included in the Consolidated Statements
of Income or Consolidated Statements of Comprehensive In-
come may differ substantially from VaR figures due to funda-
mental conceptual differences. The Consolidated Statements
of Income and Consolidated Statements of Comprehensive In-
come are prepared in accordance with IFRS. The VaR figures
are the output of a model with a purely financial perspective
and represent the potential financial loss which will not be ex-
ceeded within ten days with a probability of .%. The con-
cept of VaR is used for internal management of the Corporate
Treasury activities.
Although VaR is an important tool for measuring market risk,
the assumptions on which the model is based give rise to
some limitations including the following. A ten day holding
period assumes that it is possible to dispose of the underlying
positions within this period. While this is considered to be a
realistic assumption in almost all cases, it may not be valid
during prolonged periods of severe market illiquidity. A .%
confidence level does not reflect losses that may occur beyond
this level. There is a .% statistical probability that losses
could exceed the calculated VaR. The use of historical data as a
basis for estimating the statistic behavior of the relevant mar-
kets and finally determining the possible range of the future
outcomes on the basis of this statistic behavior may not al-
ways cover all possible scenarios, especially those of an excep-
tional nature. Any market sensitive instruments, including eq-
uity and interest bearing investments, that our Company ’s
pension plans hold are not included in the following quantita-
tive and qualitative disclosures.
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. Foreign
currency exchange rate exposure is partly balanced by pur-
chasing of goods, commodities and services in the respective
currencies as well as production activities and other contribu-
tions along the value chain in the local markets.