2007 Reference document (PDF) - Valeo

1.2. Environmental risks
In the various countries in which it operates, the Group’s business
is subject to diverse and evolving environmental regulations which
constantly raise the standard of environmental protection. Valeo’s
2. Market risks
The Group operates in an international environment in which it is
confronted with market risks, specifically foreign currency risk, price
risk and interest rate risk. It uses derivatives to manage and reduce its
exposure to changes in foreign exchange rates, raw materials prices
and interest rates. In general, foreign currency risks, price risks in
respect of base metals and interest rate risks for all Group companies
are managed centrally by Valeo. Each month, the Group Financial
Control Department provides the Chairman of Valeo with a report on
exposure to financial risks managed by the parent company and an
analysis of credit risk arising on accounts and notes receivable. This
information enables the majority of the Group’s exposure to market,
liquidity and counterparty risk to be identified. Recommendations
based on the findings of the reports are submitted to the Chairman
by the Financial Affairs Department.
The corresponding risk sensitivity analyses are disclosed in the notes
to the consolidated financial statements (note 5.3).
2.1. Foreign currency risk
Group entities may be exposed to transaction risk in respect of
purchases or sales transacted in currencies other than their
functional currency. Hedges of subsidiaries’ current and future
commercial transactions and investments are generally contracted
for durations of less than six months. Subsidiaries principally hedge
their transactions with Valeo, the parent company, which hedges
net Group positions with external counterparties. Based on the net
foreign currency position at year-end, a movement in exchange
rates would only have a minor impact on the Group’s consolidated
financial statements.
The Group is also exposed to foreign currency risk through its
investments in foreign subsidiaries, notably the risk of a movement
in the exchange rate of a subsidiary’s currency against the Group’s
functional currency. The Group decides on a case-by-case basis
whether to hedge the net investment. No derivative instrument
Management Report
Risks and uncertainties
environmental policy is described in the “Environmental management
and performance” section of the chapter , and is designed to control
and minimize environmental risks as far as possible.
hedging a net investment is recognized in the Group balance sheet
at December 31, 2007.
2.2. Metal price risk
The Group’s industrial activity requires the use of metals, particularly
non-ferrous metals, and it is therefore exposed to the risk of
fluctuations in the price of non-ferrous metals when purchase
contracts are indexed to prices. However, sale contracts entered into
with customers do not provide for any such price escalation clauses.
In most cases, the Group hedges its future purchases of base metals
over a period which is generally less than six months. The raw
materials currently hedged (aluminum, processed aluminum,
copper, zinc and tin) are quoted on official markets. The Group favors
hedging instruments which do not involve the physical delivery
of the underlying commodity. At December 31, 2007, the Group’s
balance sheet shows an unrealized loss of 12 million euros with
respect to cash flow hedges.
2.3. Interestrate risk
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The Group uses swaps to convert interest rates on its debt to either
a variable or a fixed rate, either as from origination or during the
term of the loan.
At year-end, 83% of long-term debt is at a fixed rate (82% at
December 31, 2006) and the Group’s financing rate is 4.6%, down
by 0.1% on 2006 (excluding non-strategic activities).
Taking account of derivatives, the estimated impact on consolidated
income before tax of a sudden 1% rise in short-term interest rates
applied to financial assets and liabilities at variable rates would be
a gain of 3 million euros. Similarly, a sudden 1% fall in short-term
interest rates would have a negative 3 million euro impact on
consolidated income before tax.
2007 Reference document - VALEO
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