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Market risks stem from fluctuations in prices on financial markets. Changes in exchange rates, interest rates and share prices can have an influence on the Group’s results. Due to the RWE Group’s international profile, exchange rate management is a key issue. Sterling and the US dollar are the two most important foreign currencies for two main reasons: On the one hand, the Group is engaged in business activities in these two currency zones. On the other hand, fuels are traded in these currencies. Group companies are generally required to hedge all currency risks via RWE AG, which determines the net financial position for each currency and hedges it with external market partners if necessary.
Interest rate risks stem primarily from financial debt and the Group’s interest-bearing investments. Negative changes in value caused by unexpected interest-rate movements are hedged with non-derivative and derivative financial instruments.
Opportunities and risks from changes in the values of securities are controlled by a professional fund management system. The Group’s financial transactions are recorded using centralized risk management software and monitored by RWE AG. This enables the balancing of risks across individual companies.
Group risk management has established directives for commodity Glossary operations. These regulations stipulate that derivatives may be used to hedge against price risks, optimize power plant schedules and increase margins. Furthermore, commodity derivatives may be traded, subject to limits. These limits are defined by independent organizational units and monitored on a daily basis.
All derivative financial instruments are recognized as assets or liabilities and are measured at fair value. When interpreting the positive and negative fair values of derivative financial instruments, with the exception of the commodity trading volumes (proprietary trading), it must be taken into account that they are generally matched with underlying transactions that carry offsetting risks.
Maturities of derivatives related to interest rates, currencies, equities, indices and commodities are based on the maturities of the underlying transactions and are thus primarily short-term and medium-term in nature. Maturities of up to 30 years have been agreed upon to hedge foreign currency risks of foreign investments.
The Value-at-Risk method is used to quantify the interest rate, foreign currency and share-price risks of financial instruments as well as commodity Glossary price risks, in line with the international banking standard. The maximum expected loss arising from changes in market prices is calculated on the basis of historical market volatility and is monitored continuously.
The following Value-at-Risk information relates exclusively to recognized financial instruments, in line with the mandatory rules of IFRS 7. Off-balance-sheet planned positions which are hedged and so-called executory contracts in commodities may not be taken into account. As a result, an incomplete picture of the risk situation of the RWE Group is presented.
|
Value at Risk for financial derivatives |
Value at Risk | |
|
€ million |
Dec 31, 2008 |
Dec 31, 2007 |
|
Foreign currency derivatives |
85.7 |
43.9 |
|
Forwards |
23.5 |
5.3 |
|
Options |
|
0.1 |
|
Interest rate currency derivatives |
81.7 |
44.8 |
|
Interest rate derivatives |
14.9 |
5.8 |
As of December 31, 2008, the foreign currency Value at Risk for all items to be taken into account pursuant to IFRS 7 amounted to €80.4 million (previous year: €17.2 million). In accordance with IFRS 7, underlying transactions which are the subject of a cash flow hedge were not taken into consideration in determining this position.
As of December 31, 2008, the interest rate Value at Risk from financial debts and related hedging transactions amounted to €147.4 million (previous year: €69.3 million). Taking into account the hedges, the value at risk from interest-bearing assets amounted to €46.1 million (previous year: €21.2 million).
Share price Value at Risk was €27.3 million as of December 31, 2008 (previous year: €17.3 million).
As of December 31, 2008, commodity price Value at Risk pursuant to IFRS 7 amounted to €80.4 million (previous year: €35.2 million).
All Value-at-Risk figures are based on a confidence Glossary interval of 95 % and a holding period of one day.
Credit risks.
In our financial and trading operations, credit relationships mainly exist with banks and other trading partners with good creditworthiness. Credit risks associated with contractual partners are reviewed upon conclusion of the contract and constantly monitored. We also limit credit risk by the definition of limits for trading with contractual partners and through the use of cash collateral. Credit insurance and bank guarantees are also employed. Credit risk in trading operations is monitored on a daily basis, and on a weekly basis for financial operations.
We are exposed to credit risks in our supply business, because it is possible that customers will fail to meet their financial obligations. This risk is mitigated by regular analysis of the creditworthiness of our customer portfolio based on the RWE Group’s credit risk directive. Moreover, collateral and bank guarantees are also used at times.
The maximum default risk is expressed by the carrying value of the receivables stated in the balance sheet. The default risks for derivatives correspond to their positive fair values. Defaults in the year under review and the previous year were negligible.
Liquidity risks.
As a rule, RWE AG centrally handles refinancing for RWE Group companies. In this regard, there is a risk that liquidity reserves will prove to be insufficient to meet financial obligations in a timely manner. In 2009, capital market debt with a nominal volume of approximately €0.2 billion and bank debt of €0.3 billion are due; additionally, short-term debt is also due. As of December 31, 2008, liquidity needs are covered with cash and cash equivalents, and current marketable securities totalling €8,984 million. Above and beyond this, as of the balance-sheet date, RWE AG had a fully committed, unused syndicated credit line of €3.6 billion at its disposal. There are also unused reserves of €9.8 billion from the €20 billion debt issuance programme Glossary. Accordingly, liquidity risk is extremely low.
