32.4. Market risk

4.1 HEDGING POLICY AND FINANCIAL DERIVATIVES

During the course of its general business activities, the Volkswagen Group is exposed to foreign currency, interest rate, commodity price and fund price risk. Corporate policy is to limit or eliminate such risk by means of hedging. All necessary hedging transactions are executed or coordinated centrally by Group Treasury.

The following table shows the gains and losses on hedges:

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€ million

 

2008

 

2007

Hedging instruments used in fair value hedges

 

424

 

21

Hedged items used in fair value hedges

 

–427

 

–34

Ineffective portion of cash flow hedges

 

–5

 

–16

The ineffective portion of cash flow hedges represents the income and expenses from changes in the fair value of hedging instruments that exceed the fair value of hedged items that are shown to be within the permitted range of 80% to 125% when measuring effectiveness. Such income or expenses are recognized directly in the financial result

In 2008, €–1,389 million (previous year: €–485 million) from the cash flow hedge reserve was transferred to the net other operating result and € –38 million (previous year: €–92 million) to the financial result.

The Volkswagen Group uses two different methods to present market risk from non-derivative and derivative financial instruments in accordance with IFRS 7. A value-at-risk model is used to measure foreign currency and interest rate risk in the Financial Services Division, while market risk in the Automotive Division is determined using a sensitivity analysis. The value-at-risk calculation entails determining potential changes in financial instruments in the event of variations in interest and exchange rates using a historical simulation based on the last 250 trading days. Other calculation parameters are a holding period of 10 days and a confidence level of 99%. The sensitivity analysis calculates the effect on equity and profit by modifying risk variables within the respective market risks.

4.2 MARKET RISK IN THE FINANCIAL SERVICES DIVISION

Exchange rate risk in the Financial Services Division is mainly attributable to assets that are not denominated in the functional currency and from refinancing within operating activities. Interest rate risk relates to refinancing without matching maturities and the varying interest rate elasticity of individual asset and liability items. The risks are limited by the use of currency and interest rate hedges.

A fair value portfolio hedge in accordance with IAS 39, under which fixed-rate receivables and liabilities are hedged against changes in the risk-free base rate, was used for the first time in fiscal year 2008. The assets and liabilities included in this hedging strategy are measured at fair value for the remaining term. The resulting effects in the income statement are offset by the corresponding gains and losses on the interest rate hedging instruments.

As of December 31, 2008, the value at risk for interest rate risk was €54 million (previous year: €14 million) and €95 million for foreign currency risk (previous year: €24 million).

The entire value at risk for interest rate and foreign currency risk at the Financial Services Division was €93 million (previous year: €37 million).

4.3 MARKET RISK IN THE AUTOMOTIVE DIVISION

4.3.1 Foreign currency risk

Foreign currency risk in the Automotive Division is attributable to investments, financing measures and operating activities. Currency forwards, currency options, currency swaps and cross-currency swaps are used to limit foreign currency risk. These transactions relate to the exchange rate hedging of all payments covering general business activities that are not made in the functional currency of the respective Group companies. The principle of matching currencies applies to the Group’s financing activities.

Hedging transactions performed as part of foreign currency risk management in 2008 related primarily to the US dollar, sterling, the Mexican peso, the Russian rouble, the Swedish krone, the Czech koruna, the Swiss franc, and the Japanese yen.

All non-functional currencies in which the Volkswagen Group enters into financial instruments are included as relevant risk variables in the sensitivity analysis in accordance with IFRS 7.

If the functional currencies concerned had appreciated or depreciated by 10% against the other currencies, the exchange rates shown below would have resulted in the following effects on the hedging reserve in equity and on profit before tax. It is not appropriate to add together the individual figures, since the results of the various functional currencies concerned are based on different scenarios. Due to the switch to a more meaningful presentation format, the figures for December 31, 2007 are not comparable with the aggregated individual figures for the previous year. In order to facilitate comparison nevertheless, the figures for the previous year were also calculated using the new presentation format and are given below.

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Dec. 31, 2008

 

Dec. 31, 2007

€ million

 

+10%

 

–10%

 

+10%

 

–10%

Exchange rate

 

 

 

 

 

 

 

 

EUR/USD

 

 

 

 

 

 

 

 

Hedging reserve

 

1,147

 

–712

 

994

 

–906

Profit before tax

 

–433

 

203

 

–296

 

330

EUR/GBP

 

 

 

 

 

 

 

 

Hedging reserve

 

748

 

–748

 

440

 

–429

Profit before tax

 

–30

 

55

 

–15

 

13

EUR/JPY

 

 

 

 

 

 

 

 

Hedging reserve

 

147

 

–147

 

54

 

–54

Profit before tax

 

36

 

–36

 

32

 

–28

EUR/CZK

 

 

 

 

 

 

 

 

Hedging reserve

 

118

 

–118

 

63

 

–63

Profit before tax

 

–27

 

27

 

–31

 

31

EUR/SEK

 

 

 

 

 

 

 

 

Hedging reserve

 

–137

 

137

 

43

 

–43

Profit before tax

 

1

 

–1

 

18

 

–18

EUR/CHF

 

 

 

 

 

 

 

 

Hedging reserve

 

97

 

–97

 

40

 

–40

Profit before tax

 

0

 

0

 

–1

 

1

EUR/RUB

 

 

 

 

 

 

 

 

Hedging reserve

 

44

 

–44

 

31

 

–31

Profit before tax

 

–50

 

50

 

–2

 

2

GBP/USD

 

 

 

 

 

 

 

 

Hedging reserve

 

79

 

–79

 

31

 

–25

Profit before tax

 

4

 

–3

 

7

 

–8

USD/MXN

 

 

 

 

 

 

 

 

Hedging reserve

 

59

 

–59

 

36

 

–36

Profit before tax

 

–11

 

11

 

–56

 

56

EUR/AUD

 

 

 

 

 

 

 

 

Hedging reserve

 

39

 

–39

 

46

 

–46

Profit before tax

 

–18

 

18

 

–9

 

9

CZK/USD

 

 

 

 

 

 

 

 

Hedging reserve

 

53

 

–53

 

9

 

–9

Profit before tax

 

–2

 

3

 

–4

 

4

EUR/CAD

 

 

 

 

 

 

 

 

Hedging reserve

 

36

 

–36

 

41

 

–41

Profit before tax

 

4

 

–4

 

4

 

–4

4.3.2 Interest rate risk

Interest rate risk in the Automotive Division results from changes in market interest rates, primarily for medium- and long-term variable interest receivables and liabilities. Interest rate swaps, cross-currency swaps and other types of interest rate contracts are entered into to hedge against this risk under fair value or cash flow hedges, depending on market conditions. Intra-Group financing arrangements are normally structured to match the maturities of their refinancing.

Interest rate risk within the meaning of IFRS 7 is calculated for the Automotive Division using sensitivity analyses. The effects of the risk variables in the form of market rates of interest on the financial result and on equity are presented.

The methodology used to calculate interest rate sensitivity was changed as compared with the previous year. The prior-year figures were recalculated and disclosed to facilitate comparability.

If market interest rates had been 100 bps higher as of December 31, 2008, equity would have been €39 million (previous year: €93 million) lower. If market interest rates had been 100 bps lower as of December 31, 2008, equity would have been €45 million higher (previous year: €104 million).

If market interest rates had been 100 bps higher as of December 31, 2008, profit would have been €12 million (previous year: €14 million) higher. If market interest rates had been 100 bps lower as of December 31, 2008, profit would have been €11 million lower (previous year: €14 million).

4.3.3 Commodity price risk

Commodity price risk in the Automotive Division results from price fluctuations and the availability of non-ferrous metals and precious metals, as well as of coal and CO2 certificates. Forward transactions are entered into to limit these risks.

Hedge accounting in accordance with IAS 39 was applied for the first time in 2008 to the hedging of commodity risk associated with aluminum and copper.

Commodity price risk within the meaning of IFRS 7 is presented using sensitivity analysis. These show the effect on profit and equity of changes in risk variables in the form of commodity prices.

If the commodity prices of the hedged metals had been 10% higher (lower) as of December 31, 2008, profit would have been €26 million (previous year: €158 million) higher (lower).

If the commodity prices of the hedging transactions accounted for using hedge accounting had been 10% higher (lower) as of December 31, 2008, equity would have been €48 million higher (lower).

4.3.4 Fund price risk

The Spezialfonds (special funds) launched using surplus liquidity are subject in particular to equity and bond price risk, which can arise from fluctuations in quoted market prices, stock exchange indices and market rates of interest. The changes in bond prices resulting from variations in the market rates of interest are quantified in sections 4.3.1 and 4.3.2, as are the measurement of foreign currency and other interest rate risks arising from the special funds. As a rule, we counter the risks arising from the special funds by ensuring a broad diversification of products, issuers and regional markets when investing funds, as stipulated by our Investment Guidelines. In addition, we use exchange rate hedges in the form of futures contracts when market conditions are appropriate. The relevant measures are centrally coordinated by Group Treasury and implemented in operations by the special funds’ risk management team.

As part of the presentation of market risk, IFRS 7 requires disclosures on how hypothetical changes in risk variables affect the price of financial instruments. Potential risk variables here are in particular quoted market prices or indices, as well as interest rate changes as bond price parameters.

If share prices had been 10% higher (lower) as of December 31, 2008, equity would have been €35 million (previous year: €16 million) higher (lower).

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