Fluctuations in the price of currencies and interest rates can result in significant profit and cash flow risks for Merck. Therefore, Merck centralizes these risks as far as possible and steers them in a forward-looking manner, also by using derivative financial instruments.
Foreign currency risks
Transaction risks: Owing to its international business focus, Merck is subject to currency risks within the scope of both ordinary business and financing activities. Different strategies are used to limit or exclude these risks.
In principle, currency risks from financing activities are eliminated as far as possible through the use of forward exchange contracts. Currency risks arising from operating business are analyzed regularly and reduced if necessary through forward exchange contracts or currency options using hedge accounting.
The following table presents the net currency risk from expected and recognized transactions in 2008 in the most important currencies:
| [ XLS ] |
|
€ million as of Dec. 31 |
CHF |
GBP |
JPY |
TWD |
USD |
|
Foreign exchange risk from balance sheet items |
–984.0 |
181.0 |
136.1 |
9.9 |
–97.0 |
|
Foreign exchange risk from contingent business and anticipated transactions |
–477.2 |
73.8 |
197.9 |
359.4 |
665.8 |
|
Transaction-related foreign exchange position |
–1,461.1 |
254.8 |
334.0 |
369.3 |
568.9 |
|
Position hedged by derivatives |
1,347.3 |
–191.1 |
–130.8 |
–36.0 |
–129.7 |
|
Open-end foreign exchange risk position |
–113.8 |
63.7 |
203.3 |
333.3 |
439.2 |
|
Change in foreign exchange position due to a 1% appreciation of the euro |
1.1 |
–0.6 |
–2.0 |
–3.3 |
–4.4 |
Translation risks: Many Merck companies are outside the euro zone. The financial statements of these companies are translated into euros. Exchange differences in the assets of these companies resulting from currency fluctuations are recognized in equity.
Interest rate risks
Interest rate risks relate mainly to financial liabilities and monetary deposits. If necessary, derivative financial instruments are used to change fixed interest payments into variable interest payments. The aim is to optimize the interest result and to minimize interest rate risks. Relative to net interest liabilities on the balance sheet date, a parallel shift in interest rates by 100 basis points would affect profits by €–2.6 million.
Liquidity risks
The liquidity risk, i.e. the risk that Merck cannot meet its financial obligations, is limited by the creation of the necessary financial flexibility and by effective cash management. Apart from liquid assets of €991.9 million, Merck has at its disposal a multi-currency revolving credit line of €2 billion to be used for business purposes with a term of seven years as well as bilateral credit facilities of €559.0 million. Moreover, a commercial paper program with a volume of €500 million exists. The following table presents the contractually set payments such as repayments and interest on financial liabilities carried in the balance sheet and derivative financial instruments with a negative market value:
| [ XLS ] |
|
|
Book value |
Cash flows |
Cash flows |
Cash flows | |||
|
€ million |
Interest |
Repay- |
Interest |
Repay- |
Interest |
Repay- | |
|
Debt securities and Commercial Paper |
976.1 |
41.4 |
6.9 |
114.6 |
1,000.0 |
– |
– |
|
Bank loans and overdrafts |
142.6 |
3.9 |
129.7 |
1.7 |
7.6 |
0.4 |
4.9 |
|
Other financial liabilities |
78.1 |
3.8 |
25.2 |
5.4 |
42.0 |
– |
10.9 |
|
Miscellaneous other liabilities |
100.6 |
4.0 |
100.6 |
– |
– |
– |
– |
|
Financial leasing liabilities |
9.9 |
0.1 |
9.4 |
0.1 |
0.6 |
– |
– |
|
Derivative financial liabilities |
40.1 |
7.0 |
11.7 |
27.7 |
0.1 |
– |
– |
|
|
1,347.0 |
60.1 |
283.4 |
149.5 |
1,050.3 |
0.4 |
15.8 |
Credit risks
Merck is subject to a very low credit risk, i.e. the unexpected loss of payment funds or income. On the one hand, financial contracts are only entered into with prime-rated banks. On the other hand, the broad-based business structure of the Merck Group means that there is no particular concentration of credit risks as regards either customers or specific countries.
