(36) Risk management and financial instruments
Risk management principles
The Jungheinrich Group’s risk management system is designed to enable the company to identify developments in financial price risks — resulting above all from interest rate and currency risks — early on and react to them via systematic courses of action both rapidly and effectively. Furthermore, it ensures that the Group only concludes financial transactions for which it possesses the necessary expertise and technical preconditions.
Financial markets afford one the opportunity to transfer risks to other market participants, who have a comparative advantage or a higher capacity for accepting risks. The Jungheinrich Group makes use of these opportunities solely to hedge risks arising from underlying operating transactions and to invest or raise liquid funds. Group guidelines do not allow the conclusion of financial transactions that are speculative in nature. As a rule, the Jungheinrich Group’s financial transactions may only be concluded with banks or leasing companies as contractual partners.
The Board of Management as a whole bears responsibility for the initiation of organizational measures required to limit financial price risks. Jungheinrich has established a risk controlling and risk management system that enables it to identify, measure, monitor and control its risk positions. Risk management encompasses the development and determination of methods to measure risk and performance, monitor established risk limits, and set up the associated reporting system.
Jungheinrich controls financial risks arising from its core business centrally as part of the Group strategy. Risks stemming from the Jungheinrich Group’s financial services operations are subject to a separate risk management system.
Risks specific to the financial services business primarily arise from changes in interest rates, residual value guarantees granted to leasing companies, and break-of-contract clauses and other contractual arrangements agreed on with customers. Reference is made to the commentary on credit risks as regards general default risks in connection with customers.
Groupwide sales guidelines, which include key risk mitigation standards and thus sufficiently limit the freedom of the scope of contracts concluded with customers and financers, are a major component of the risk management system in place for the financial services business. Among the measures taken in this regard is the calculation of lease and rental agreements based on fixed interest rates over the entire contractual period, with identical periods and interest rates for customer and financing contracts.
Maximum values are defined for the residual value items that become negotiable once the contracts expire. They take the local situation into account, e.g., the inventory in stock in the relevant country and the market prices of used equipment. Cases where the maximum value of negotiable residual value items is exceeded are anticipated by carrying provisions as liabilities as part of the precautionary measures for risks. Break clauses in customer contracts are sufficiently limited in scope and bound to risk-mitigating requirements, e.g., minimum contractual periods and order volumes, cancellation periods, anti-competition covenants and customer use obligations that take precedence over the return of the equipment.
Market price risks
Market price risks are risks arising from changes in an item’s realizable income or value, whereby the item is defined as an item on the assets or liabilities side of the balance sheet. These risks result from changes in interest rates, foreign exchange rates, share prices and other items and factors affecting the formation of prices. These parameters are used to determine the interest rate and currency risk exposure of the Jungheinrich Group. Changes in share prices do not constitute a risk for the Jungheinrich Group since the Group did not hold any shares in the period under review.
Interest rate risks
Interest rate risks result from the Group’s financing and cash investment activity. Variable and fixed-interest items are regarded separately in order to determine this risk. Interest-bearing instruments on the assets and liabilities sides are aggregated to net positions and hedges are concluded to cover these net positions, if necessary. Interest rate swaps were used to hedge interest rates in the period being reviewed.
The Jungheinrich Group’s interest rate risks include cash flow risks arising from variable-interest financial instruments.
If going interest rates had been 100 basis points higher (lower) as of December 31, 2008, income would have been €1,045 thousand (December 31, 2007: €1,372 thousand) higher (lower). Since income and expenses associated with all of the financial instruments is considered in the statement of income, there is no additional effect on shareholders’ equity.
Currency risks
When calculating this risk position, the Jungheinrich Group considers foreign currency inflows and outflows, primarily from sales and purchases based on firm and flexible contracts. This risk position reflects the net currency exposure resulting from balancing counteracting cash flows in individual currencies while taking hedges already concluded for the period in question into account. Jungheinrich used currency futures, currency swaps and currency options to manage risks in the period under review.
The Jungheinrich Group applies the Value at Risk approach to quantify the ‘currency risk’ position. The Value at Risk indicates the maximum loss that may not be exceeded before the end of a pre-determined holding period and with a certain probability (confidence interval). Parameters and market volatility, which are used to quantify risk, are calculated based on the standard deviation of logarithmized changes in the last 180 trading days and converted to a one-day holding period with a one-sided confidence interval of 95 per cent.
To manage risk, the Board of Management defines a loss limit for the entire Group. Furthermore, the risk exposure of individual Group companies is managed by pre-determined lower limits. These limits are compared to the Value at Risk quantified for all open positions as part of monthly reporting.
By applying the Value at Risk method, as of December 31, 2008, the maximum risk did not exceed €1,111 thousand (prior year: €756 thousand) based on a holding period of one day and a confidence interval of 95 per cent. In the period under review, the Value at Risk was between a minimum of €345 thousand (prior year: €443 thousand) and a maximum of €1,111 thousand (prior year: €756 thousand). The average for the year was €792 thousand (prior year: €535 thousand).
Credit risks
Jungheinrich’s exposure to credit risks nearly exclusively stems from its core business. Trade accounts receivable from operations are constantly monitored by the business units responsible for them. Credit risks are managed by recognizing valuation allowances triggered by events and also by recognizing general valuation allowances.
The entire business is constantly subjected to creditworthiness checks. Given the overall exposure to credit risks, accounts receivable from major customers are not substantial enough to give rise to extraordinary risk concentrations. Agreements struck with customers and measures taken within the scope of risk management that minimize the creditworthiness risk largely consist of agreements on pre-payments made by customers, the sharing of risks with financers, the permanent monitoring of customers via information portals and the purchase of credit insurance.
The maximum credit risk is reflected by the carrying amounts of the financial assets recognized on the balance sheet. As of the balance sheet date, there were no major agreements that reduced the maximum credit risk such as offsetting arrangements.
Liquidity risks
A liquidity reserve consisting of lines of credit and of cash is kept in order to ensure that the Jungheinrich Group can meet its payment obligations and maintain its financial flexibility at all times. Jungheinrich converted major portions of its short-term credit lines into medium-term credit lines for this purpose. These lines of credit have been granted by the Group’s principal banks and are supplemented by short-term credit lines of individual Group companies awarded by local banks.
The Group is exposed to a counterparty risk that arises from the non-fulfilment of contractual agreements by counterparties. The contractual partners concerned are generally international financial institutions. On the basis of their credit rating, which is determined by reputable rating agencies, no major risk ensues for Jungheinrich from its dependence on individual counterparties. The general liquidity risk from the financial instruments used is considered to be negligible.
Hedges
The Jungheinrich Group concludes cash flow hedges to secure future cash flows resulting from sales and purchases of materials that are partially realized and partially forecasted, but highly probable. Comprehensive documentation ensures the clear assignment of hedges and underlying transactions. No more than 75 per cent of the hedged amounts are designated as underlying transactions, which, in turn, can be fully hedged. Therefore, the hedges can prospectively be classified as highly effective. An assessment of the retroactive effectiveness of hedges is conducted at the end of every month.
Nominal value of hedging instruments
The nominal value of currency hedging contracts as of the balance sheet date was €177,773 thousand (prior year: €109,451 thousand).
The currency hedging contracts contain forward exchange transactions and currency options that are used to hedge against rolling 12-month exposure in individual currencies. As a rule, the term of such contracts does not exceed a period of 12 months.
As of the balance sheet date, interest hedges had a nominal value of €663 thousand (prior year: €- thousand) and were concluded to hedge long-term interest rates. The interest-rate hedges’ terms correspond to those of the hedged underlying transactions and have terms expiring in 2013.
The contract volumes stated and the nominal values of derivative financial instruments do not always represent volumes that are exchanged by counterparties, and they are therefore not necessarily a yardstick for the risk to which Jungheinrich is exposed through their use.
Fair values of hedging instruments
The fair value of a hedging instrument is the price at which the instrument could have been sold on the market as of the balance sheet date. Fair values were calculated on the basis of market-related information available as of the balance sheet date and on the basis of valuation methods stated below that are based on specific prices. In view of the varying influencing factors, the values stated here may differ from the values realized on the market later on.
The fair value of forward exchange transactions is determined on the basis of current reference prices taking account of forward premiums and discounts. Currency options are measured as of the balance sheet date using option price models. The fair value of interest derivatives is determined on the basis of current reference interest rates, taking account of the respective payment due dates.
The following table shows the fair values of derivative financial instruments:
The fair value of interest hedges of €16 thousand (prior year: €- thousand) is a component of other liabilities.
Net gains on changes in the fair value of hedging instruments realized and recognized directly in shareholders’ equity in fiscal 2008 totalled €8,721 thousand (prior year: gains of €2,584 thousand). In the 2008 financial year, a net gain of €3,719 thousand (prior year: net loss of €652 thousand) which was recognized in shareholders’ equity was transferred to the cost of sales and to other operating income and expenses in the statement of income. Hedges concluded as of the balance sheet date did not display any material ineffectiveness.