Engineering

3.6 Consolidated financial statements Notes to the consolidated financial statements
3.6 Consolidated financial statements Notes to the consolidated financial statements
maturity. Financial transactions and the transactions undertaken by our
subsidiaries outside the Euro zone are hedged in close cooperation
with central Group management. Compliance with the Group’s
requirements is regularly ascertained by our Corporate Center Internal
Auditing.
Foreign currency hedging is used to fix prices on the basis of hedging
rates as protection against any unfavorable exchange rate fluctuations
in the future. When hedging anticipated production-related ore, coal
and coke purchases, favorable developments in the Euro/US dollar
exchange rate are also systematically exploited.
Hedging periods are generally based on the maturities of underlying
transactions. Foreign currency derivative contracts usually have
maturities of twelve months or less, but can also be significantly longer
in exceptional cases. The hedging periods for forecasted ore, coal and
coke purchases have been established on the basis of a theoretical fair
exchange rate (based on purchasing power parity) and the margin of
fluctuation between the US dollar and the Euro based on historical
data. In accordance with a set pattern, purchases forecasted for a
specific period are hedged whenever defined hedging rates are
reached.
The US dollar is the only relevant risk variable for sensitivity analyses
under IFRS 7, as the vast majority of foreign currency cash flows
occurs in US dollars. As hedging transactions are generally used to
hedge underlying transactions, opposite effects in underlying and
hedging transactions are almost entirely offset over the total period.
Thus, the currency risk exposure described here results from hedging
relationships with off-balance sheet underlying transactions, i.e.
hedges of firm commitments and forecasted sales. Based on our
analysis, the US dollar exposure as of September 30, 2011 was as
follows:
If the Euro had been 10% stronger against the US dollar as of
September 30, 2011, the hedge reserve in equity and fair value of
hedging transactions would have been €170 million (2010: €118
million) lower and earnings resulting from the measurement as of the
balance sheet date €88 million (2009/2010: €125 million) higher. If the
Euro had been 10% weaker against the US dollar as of September 30,
2011, the hedge reserve in equity and fair value of hedging
transactions would have been €206 million (2010: €145 million) higher
and earnings resulting from the measurement as of the balance sheet
date €106 million (2009/2010: €151 million) lower.
Interest rate risk
Due to the international focus of ThyssenKrupp’s business activities,
the Group procures liquidity to cover its financial needs in international
money and capital markets in different currencies and with various
maturities. Some of the resulting financial debt and financial
investments are exposed to interest rate risk. The Group’s central
interest rate management manages and optimizes interest rate risk.
This includes regular interest analyses. In some cases, the Group uses
derivatives to hedge interest rate risk. These instruments are
contracted with the objective of minimizing interest rate volatilities and
finance costs for underlying transactions.
The major part of the interest derivatives is immediately and directly
allocated to particular financings as cash flow or fair value hedges.
These are derivatives that qualify for hedge accounting. A small part of
the interest derivatives is not specifically allocated to an individual
financing but hedges a portfolio of individual loans using a macro
hedge approach.
Cross currency swaps have been contracted primarily in connection
with the US dollar financing activities.
Interest rate instruments can result in cash flow risks, opportunity
effects, as well as interest rate risks affecting the balance sheet and
earnings. Refinancing and variable-rate financial instruments are
subject to cash flow risk which expresses the uncertainty of future
interest payments. Cash flow risk is measured by means of cash flow
sensitivity. Opportunity effects arise from non-derivatives, as these are
measured at amortized cost rather than fair value, in contrast to
interest derivatives. This difference, the so-called opportunity effect,
affects neither the balance sheet nor the statement of income. Onbalance
sheet interest rate risks affecting equity result from the
measurement of interest derivatives qualifying as cash flow hedges.
Interest rate risks affecting earnings arise from the remaining interest
rate derivatives not qualifying for hedge accounting. Opportunity
effects and interest rate risks affecting the balance sheet and earnings
are determined by calculating fair value sensitivity analyses and
changes.
As of September 30, 2011, a +100/(20) basis point parallel shift in
yield curves is assumed for all currencies in interest analyses. In fiscal
year 2008/2009 the parallel downward shift was reduced to (20) basis
points to consider the reduced interest level as a result of the financial
crisis and to avoid negative interest rates. Due to the still relatively low
184