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Annual Report

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. There were no significant risk concentrations in the past fiscal year.

The following table shows the gains and losses on hedges:

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€ million

 

2010

 

2009

Hedging instruments used in fair value hedges

 

–105

 

–326

Hedged items used in fair value hedges

 

30

 

278

Ineffective portion of cash flow hedges

 

38

 

–2

The ineffective portion of cash flow hedges represents the income and expenses from changes in the fair value of hedging instruments that exceed the changes in the fair value of the 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 2010, €–310 million (previous year: €–1,087 million) from the cash flow hedge reserve was transferred to the net other operating result, increasing earnings, while €16 million (previous year: €76 million) was transferred to the financial result, reducing earnings and €26 million (previous year: €103 million) to the cost of sales, also reducing earnings.

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 Volkswagen Financial Services subgroup, while market risk in the other Group companies 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 1,000 trading days. Other calculation parameters are a holding period of 40 days and a confidence level of 99%. In fiscal year 2010, the trading days and time frame parameters were expanded to reflect the extended data history. The amounts for fiscal year 2009 were adjusted accordingly. The sensitivity analysis calculates the effect on equity and profit or loss by modifying risk variables within the respective market risks.

4.2 MARKET RISK AT VOLKSWAGEN FINANCIAL SERVICES

Exchange rate risk in the Volkswagen Financial Services subgroup 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.

Microhedges and – since 2008 – portfolio hedges are used for interest rate hedging. Fixed-rate assets and liabilities included in the hedging strategy are recognized at fair value, as opposed to their original subsequent measurement at amortized cost. The resulting effects in the income statement are offset by the corresponding gains and losses on the interest rate hedging instruments (swaps). Currency hedges (currency forwards and cross-currency swaps) are used to mitigate foreign currency risk. All cash flows in foreign currency are hedged. Due to the changes made to the trading days and time frame parameters in fiscal year 2010 to reflect the extended data history, the prior-year amounts for value at risk were adjusted accordingly.

As of December 31, 2010, the value at risk was €203 million (previous year: €199 million) for interest rate risk and €125 million for foreign currency risk (previous year: €98 million).

The entire value at risk for interest rate and foreign currency risk at the Volkswagen Financial Services subgroup was €179 million (previous year: €171 million).

4.3 MARKET RISK IN THE PASSENGER CARS AND LIGHT COMMERCIAL VEHICLES SEGMENT AND THE SCANIA SUBGROUP

4.3.1 Foreign currency risk

Foreign currency risk in the Passenger Cars and Light Commercial Vehicles segment and the Scania subgroup 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 in 2010 as part of foreign currency risk management for the fully consolidated subsidiaries related primarily to the US dollar, sterling, the Czech koruna, the Swedish krona, the Russian ruble, the Australian dollar, 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. It is not appropriate to add together the individual figures, since the results of the various functional currencies concerned are based on different scenarios.

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Dec. 31, 2010

 

Dec. 31, 2009

€ million

 

+10 %

 

–10 %

 

+10 %

 

–10 %

Exchange rate

 

 

 

 

 

 

 

 

EUR/USD

 

 

 

 

 

 

 

 

Hedging reserve

 

2,496

 

–2,359

 

926

 

–684

Profit before tax

 

–254

 

196

 

–195

 

68

EUR/GBP

 

 

 

 

 

 

 

 

Hedging reserve

 

833

 

–833

 

447

 

–443

Profit before tax

 

–3

 

3

 

5

 

5

EUR/JPY

 

 

 

 

 

 

 

 

Hedging reserve

 

264

 

–264

 

–63

 

63

Profit before tax

 

8

 

–8

 

–2

 

2

EUR/CHF

 

 

 

 

 

 

 

 

Hedging reserve

 

246

 

–246

 

98

 

–98

Profit before tax

 

–1

 

1

 

–1

 

1

EUR/SEK

 

 

 

 

 

 

 

 

Hedging reserve

 

134

 

–134

 

–44

 

44

Profit before tax

 

–21

 

21

 

–10

 

10

EUR/AUD

 

 

 

 

 

 

 

 

Hedging reserve

 

124

 

–124

 

41

 

–41

Profit before tax

 

–24

 

24

 

–21

 

21

EUR/CZK

 

 

 

 

 

 

 

 

Hedging reserve

 

121

 

–121

 

56

 

–56

Profit before tax

 

0

 

0

 

–29

 

29

EUR/CAD

 

 

 

 

 

 

 

 

Hedging reserve

 

113

 

–113

 

42

 

–42

Profit before tax

 

0

 

0

 

–9

 

9

CZK/GBP

 

 

 

 

 

 

 

 

Hedging reserve

 

87

 

–87

 

32

 

–32

Profit before tax

 

0

 

0

 

0

 

0

EUR/RUB

 

 

 

 

 

 

 

 

Hedging reserve

 

29

 

–29

 

0

 

0

Profit before tax

 

–54

 

54

 

–44

 

44

CZK/USD

 

 

 

 

 

 

 

 

Hedging reserve

 

64

 

–64

 

41

 

–41

Profit before tax

 

–4

 

4

 

–4

 

4

CZK/CHF

 

 

 

 

 

 

 

 

Hedging reserve

 

67

 

–67

 

16

 

–16

Profit before tax

 

0

 

0

 

0

 

0

EUR/PLN

 

 

 

 

 

 

 

 

Hedging reserve

 

–48

 

48

 

9

 

–9

Profit before tax

 

–8

 

8

 

–3

 

3

GBP/USD

 

 

 

 

 

 

 

 

Hedging reserve

 

54

 

–54

 

61

 

–61

Profit before tax

 

0

 

0

 

–1

 

1

4.3.2 Interest rate risk

Interest rate risk in the Passenger Cars and Light Commercial Vehicles segment and the Scania subgroup 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 these companies 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.

If market interest rates had been 100 bps higher as of December 31, 2010, equity would have been €3 million lower (previous year: €16 million). If market interest rates had been 100 bps lower as of December 31, 2010, equity would have been €8 million higher (previous year: €18 million).

If market interest rates had been 100 bps higher as of December 31, 2010, profit would have been €78 million (previous year: €0.3 million) higher. If market interest rates had been 100 bps lower as of December 31, 2010, profit would have been €79 million lower (previous year: €1 million).

4.3.3 Commodity price risk

Commodity price risk in the Passenger Cars and Light Commercial Vehicles segment and the Scania subgroup results from price fluctuations and the availability of non-ferrous metals and precious metals, as well as of coal and CO2 certificates. Forward transactions and swaps are entered into to limit these risks.

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

Commodity price risk within the meaning of IFRS 7 is presented using sensitivity analyses. 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, 2010, profit would have been €105 million (previous year: €42 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, 2010, equity would have been €125 million (previous year: €113 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 as of December 31, 2010, equity would have been €26 million (previous year: €18 million) higher. If share prices had been 10% lower as of December 31, 2010, equity would have been €28 million (previous year: €18 million) lower.

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