Annual Report 2011 (5.07 MB, PDF-File) - Oerlikon

122
Market risk
Key Figures Group Notes OC Oerlikon Corporation AG, Pfäffikon
Notes to the consolidated financial statements
Market risk is the risk that the fair value or the future cash flows of a financial instrument may change as a result of fluctuations in market
prices. Oerlikon is exposed in particular to fluctuations in foreign exchange and interest rates. The Group also has a minor risk from
exposure to fluctuations in raw material prices.
The Group’s financial risk management aims to limit any adverse effects that the markets may have on the Group’s financial health, at an
acceptable hedging cost. Risk limitation does not mean complete exclusion of financial risks, rather it means following a policy of economically
sensible management of the Group’s finances within an agreed framework of documented authority. The Group uses derivative
financial instruments to hedge certain risks. Only pre-approved instruments are used, and as a fundamental rule, no speculative
transactions are conducted in the areas of foreign exchange or interest rates. No hedges are entered into without a corresponding base
transaction. Management monitors and steers such risks continuously with the support of Group Treasury, who identifies and evaluates
all financial risks, working with the Group’s operating companies and hedging the risks as appropriate. The Group has documented
guidelines for financial risk management, covering the use of derivative and non-derivative financial instruments and policies for use of
surplus funds.
Currency risk
Foreign exchange transaction risk
The Group has adopted the Swiss franc as its reporting currency. Due to its most significant markets, the Group is primarily exposed to
exchange risks versus the US dollar and Euro. If costs and revenues of Group companies are incurred or earned in differing or non-local
currencies, the underlying business transactions are hedged on a centrally coordinated basis by means of commonly used financial instruments.
Group companies make regular plans for receipt or payment of cash in foreign currencies and advise these to Group Treasury,
who hedges the related exchange risks using internal hedging contracts with the companies concerned and external contracts with
first-class banks.
The Group’s hedging strategy for exchange risks distinguishes between the routine business of supplying components or spare parts
and the Group’s project activities. For the routine business, cash flows in foreign currencies are hedged for a whole year in advance,
based on the annual budget. The hedging quota, i.e. the percentage of the base volume to be hedged, is set forth in the related guidelines.
Every month a check is made as to whether the latest forecast of business volumes calls for an increase or a reduction in the
hedging volume. For projects, the exchange risks are hedged when the contract is entered into. For special transactions, which do not
fall into either category – routine or project – the hedging strategy can be determined for individual cases.
Foreign exchange translation risk
Translation exposure arises from consolidation of foreign currency denominated financial statements of the Group’s subsidiaries. The
Group’s consolidated financial statements are reported in Swiss francs. The risk arising from foreign subsidiary balance sheets – the
effect of which is a currency impact on consolidated Group equity – is not hedged, however foreign currency debts partially minimize this
currency translation risk.
Foreign exchange economic risk
The Group policy is not to hedge long-term foreign exchange risk.
The following rates were used to convert the most important foreign currencies in the financial statements:
Average rates Change Year-end rates Change
2011 2010 10/11 2011 2010 10/11
1 USD 0.887 1.043 –15.0 % 0.940 0.935 0.5 %
1 EUR 1.233 1.382 –10.8 % 1.219 1.243 –1.9 %
100 CNY 13.700 15.400 –11.0 % 14.900 14.200 4.9 %
100 HKD 11.300 13.400 –15.7 % 12.100 12.000 0.8 %
100 JPY 1.112 1.188 –6.4 % 1.212 1.148 5.6 %
1 SGD 0.705 0.765 –7.8 % 0.723 0.726 –0.4 %
Sensitivity analysis
For the sensitivity analysis the two most important currencies were selected in which the Group holds significant amounts of receivables
and payables. Based on a two-year volatility of 13.8 % (USD/CHF) and 12.67 % (EUR/CHF) a corresponding change in exchange rates
at December 31, 2011 would have changed the equity and the income statement by the amounts listed below.
31 December 2011 2010
Effect in CHF million Equity Income Statement Equity Income Statement
USD –1 6 2 –
EUR 1 3 – –
A 13.8 % (USD/CHF) and 12.67 % (EUR/CHF) weakening of the Swiss francs against the above currencies would have had the same but opposite
effect on the above currencies to the amounts shown above, assuming all other variables remain constant. In the previous period the sensitivity
analysis was calculated with 11.55 (USD/CHF) and 7.74 (EUR/CHF).
Note 20