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, equity price and fund price risk. Corporate policy is to limit or eliminate such risk by means of hedging. All necessary hedging transactions with the exception of the Scania and MAN subgroups 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

 

2011

 

2010

Hedging instruments used in fair value hedges

 

206

 

–105

Hedged items used in fair value hedges

 

–220

 

30

Ineffective portion of cash flow hedges

 

–7

 

38

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 but that are shown to be within the permitted range of 80% to 125% overall when measuring effectiveness. Such income or expenses are recognized directly in the financial result.

In 2011, €–71 million (previous year: €–310 million) from the cash flow hedge reserve was transferred to the net other operating result, increasing earnings, while €29 million (previous year: €16 million) was transferred to the financial result, reducing earnings, and €–24 million (previous year: €26 million) was included in the cost of sales, increasing earnings.

The Volkswagen Group uses two different methods to present market risk from nonderivative 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%. 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 IN THE VOLKSWAGEN GROUP
(EXCLUDING VOLKSWAGEN FINANCIAL SERVICES)

4.2.1 Foreign currency risk

Foreign currency risk in the Volkswagen Group (excluding Volkswagen Financial Services) 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 2011 as part of foreign currency risk management related primarily to sterling, the US dollar, the Chinese renminbi, the Swiss franc, the Japanese yen, the Swedish krona, the Russian ruble and the Australian dollar.

All nonfunctional 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 after tax. Starting in fiscal year 2011, the effect of foreign exchange differences is reported net of tax. The prior-year figures were adjusted to aid comparability. 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, 2011

 

Dec. 31, 2010

€ million

 

+10 %

 

–10 %

 

+10 %

 

–10 %

Exchange rate

 

 

 

 

 

 

 

 

EUR/USD

 

 

 

 

 

 

 

 

Hedging reserve

 

1,519

 

–1,471

 

1,760

 

–1,663

Profit after tax

 

–207

 

185

 

–179

 

138

EUR/GBP

 

 

 

 

 

 

 

 

Hedging reserve

 

897

 

–897

 

587

 

–587

Profit after tax

 

3

 

–3

 

–2

 

2

EUR/CHF

 

 

 

 

 

 

 

 

Hedging reserve

 

354

 

–354

 

173

 

–173

Profit after tax

 

–6

 

6

 

0

 

0

EUR/CNY

 

 

 

 

 

 

 

 

Hedging reserve

 

271

 

–271

 

11

 

–11

Profit after tax

 

–76

 

76

 

3

 

–3

EUR/JPY

 

 

 

 

 

 

 

 

Hedging reserve

 

189

 

–189

 

186

 

–186

Profit after tax

 

9

 

–9

 

5

 

–5

EUR/SEK

 

 

 

 

 

 

 

 

Hedging reserve

 

125

 

–125

 

95

 

–95

Profit after tax

 

–26

 

26

 

–15

 

15

EUR/AUD

 

 

 

 

 

 

 

 

Hedging reserve

 

97

 

–97

 

87

 

–87

Profit after tax

 

–23

 

23

 

–17

 

17

EUR/CZK

 

 

 

 

 

 

 

 

Hedging reserve

 

73

 

–73

 

85

 

–85

Profit after tax

 

–36

 

36

 

0

 

0

EUR/PLN

 

 

 

 

 

 

 

 

Hedging reserve

 

–75

 

75

 

–34

 

34

Profit after tax

 

–19

 

19

 

–6

 

6

EUR/CAD

 

 

 

 

 

 

 

 

Hedging reserve

 

92

 

–92

 

79

 

–79

Profit after tax

 

0

 

0

 

0

 

0

CZK/GBP

 

 

 

 

 

 

 

 

Hedging reserve

 

88

 

–88

 

62

 

–62

Profit after tax

 

0

 

0

 

0

 

0

CZK/CHF

 

 

 

 

 

 

 

 

Hedging reserve

 

66

 

–66

 

47

 

–47

Profit after tax

 

0

 

0

 

0

 

0

CZK/USD

 

 

 

 

 

 

 

 

Hedging reserve

 

62

 

–62

 

45

 

–45

Profit after tax

 

–2

 

2

 

–3

 

3

EUR/HUF

 

 

 

 

 

 

 

 

Hedging reserve

 

–58

 

58

 

–18

 

18

Profit after tax

 

3

 

–3

 

0

 

0

EUR/RUB

 

 

 

 

 

 

 

 

Hedging reserve

 

9

 

–9

 

20

 

–20

Profit after tax

 

–49

 

49

 

–38

 

38

4.2.2 Interest rate risk

Interest rate risk for the Volkswagen Group (excluding Volkswagen Financial Services) 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 primarily under fair value or cash flow hedges, and depending on market conditions. Intragroup 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, net of tax. Starting in fiscal year 2011, the sensitivities are presented net of tax; the prior-year figures were adjusted.

If market interest rates had been 100 bps higher as of December 31, 2011, equity would have been €60 million (previous year: €2 million) lower. If market interest rates had been 100 bps lower as of December 31, 2011, equity would have been €58 million (previous year: €6 million) higher.

If market interest rates had been 100 bps higher as of December 31, 2011, profit after tax would have been €120 million (previous year: €55 million) higher. If market interest rates had been 100 bps lower as of December 31, 2011, profit would have been €124 million (previous year: €55 million) lower.

4.2.3 Commodity price risk

Commodity price risk in the Volkswagen Group (excluding Volkswagen Financial Services) primarily results from price fluctuations and the availability of nonferrous metals and precious metals, as well as of coal, CO2 and rubber certificates. Forward transactions and swaps are entered into to limit these risks.

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

Commodity price risk within the meaning of IFRS 7 is presented using sensitivity analyses. These show the effect on profit after tax and equity of changes in risk variables in the form of commodity prices. Starting in fiscal year 2011, the effect of changes in commodity prices is reported net of tax. The prior-year figures were adjusted to aid comparability.

If the commodity prices of the hedged metals, coal and rubber had been 10% higher (lower) as of December 31, 2011, profit after tax would have been €169 million (previous year: €74 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, 2011, equity would have been €84 million (previous year: €88 million) higher (lower).

4.2.4 Equity and bond price risk

The Spezialfonds (special funds) launched using surplus liquidity and the equity interests measured at fair value are subject in particular to equity price 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 4.2.1 and 4.2.2, as are the measurement of foreign currency and other interest rate risks arising from the special funds and the equity interests measured at fair value.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. With the exception of the Scania and MAN subgroups, the relevant measures are centrally coordinated by Group Treasury and implemented at an operational level 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. Starting in fiscal year 2011, the effect of changes in risk variables is presented net of tax. The prior-year figures were adjusted to aid comparability.

If share prices had been 10% higher as of December 31, 2011, equity would have been €159 million (previous year: €18 million) higher. If share prices had been 10% lower as of December 31, 2011, equity would have been €159 million (previous year: €20 million) lower.

4.3 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.

As of December 31, 2011, the value at risk was €167 million (previous year: €203 million) for interest rate risk and €168 million for foreign currency risk (previous year: €125 million).

The entire value at risk for interest rate and foreign currency risk at the Volkswagen Financial Services subgroup was €196 million (previous year: €179 million).

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