Siemens 2013 Annual Report Download - page 320

92 A. To our Shareholders 117 B. Corporate Governance 155 C. Combined Management Report

. This interest rate risk results primarily from euro and U.S.
dollar denominated long-term fixed rate debt obligations. The
increase in VaR related mainly to a decrease in the portion of
the Company ’s underlying notes and bonds being changed
from fixed interest rates into variable interest rates by using
interest rate swap contracts, and to an increased volatility of
relevant medium-term interest rates.
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 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 forecast and pending
commodity purchase transactions (commodity price risk ex-
posure). The binding guideline for Siemens operating units
provides the concept for the identification and determination
of the commodity price risk exposure and commits the units
to hedge it within a narrow band of % to % of the com-
modity price risk exposure in the product business for the
next three months and % to % of the commodity price
risk exposure in the project business after receipt of order.
Siemens operating units are prohibited from speculative
transactions.
The aggregated commodity price risk exposure is hedged with
external counterparties through derivative financial hedging
instruments by Corporate Treasury. Derivative financial hedg-
ing instruments designated for hedge accounting are directly
entered into with external counterparties. Additionally, Siemens
applies a Company-wide portfolio approach which generates a
benefit from optimizing the Company ’s position of the overall
financial commodity price risk.
Using historical volatilities and correlations, a ten day holding
period and a confidence level of .%, the VaR, which com-
prises the net position of commodity derivatives and the com-
modity purchase transactions with price risk, was € million
as of September ,  compared to € million as of Sep-
tember , .
EQUITY PRICE RISK
Siemens’ investment portfolio consists of direct and indirect
investments in publicly traded companies held for purposes
other than trading. The direct participations result mainly from
strategic partnerships, strengthening Siemens’ focus on its
core business activities or compensation from M&A transac-
tions; indirect investments in fund shares are mainly transact-
ed for financial reasons.
These investments are monitored based on their current mar-
ket value, affected primarily by fluctuations in the volatile
technology-related markets worldwide. The market value of
Siemens’ portfolio in publicly traded companies increased
from € million as of September ,  to €. billion as
of September , , which was due primarily to the recog-
nition of our .% stake in OSRAM after the spin-off.
Based on historical volatilities and correlations, a ten day
holding period and a confidence level of .%, the VaR as of
September ,  of Siemens’ equity investments was €
million compared to € million the year before.
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. In addition to having implemented effective working
capital and cash management, Siemens mitigates liquidity risk
by arranged credit facilities with highly rated financial institu-
tions, via a debt issuance program and via a global multi-cur-
rency commercial paper program. Liquidity risk may also be
mitigated by the Siemens Bank GmbH, which increases the
flexibility of depositing cash or refinancing by using European
Central Bank accounts.
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 as well as from irrevocable loan commit-
ments. It includes expected net cash outflows from derivative
financial liabilities that are in place as per September , .
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 respec-