[38] Derivative financial instruments 

We use derivative financial instruments exclusively to hedge currency and interest rate positions, and thereby minimize currency risks and financing costs caused by exchange rate or interest rate fluctuations. The instruments used are marketable forward exchange contracts and interest rate swaps. The strategy to hedge the transaction risk arising from currency fluctuations is set by a Group interest rate and currency committee, which meets on a regular basis. A review period of up to 36 months normally serves as the basis. Every hedge must relate to an underlying transaction that either already exists or is definitely expected to take place (ban on speculation). Currency risks from financial assets or loans denominated in foreign currencies are generally hedged. The use of such derivative contracts is governed by internal regulations, and derivative transactions are subject to continuous risk management procedures. Trading, settlement and control functions are strictly separated, and this separation is monitored by our internal audit department. Derivative contracts are only entered into with banks that have a good credit rating and they are restricted to the hedging of our business operations and related financing transactions.

The following derivative financial positions were held as of the balance sheet date:

The nominal volume is the aggregate of all buy and sell amounts relating to derivative contracts. The fair values result from the valuation of open positions at market prices, ignoring any opposite movements in the value of the underlyings. They correspond to the income or expenses which would result if the derivatives contract were closed out as of balance sheet date. Transactions are recognized at fair value on the basis of quoted prices or current market data provided by a recognized information service.

The maturity structure of the hedging transactions (nominal volume) is as follows as of the balance sheet date:

Gains and losses on the fair value of derivatives and underlyings are usually recognized directly in the income statement. If cash flows are being hedged and the requirements for hedge accounting in accordance with IAS 39.88 are met, the effective portions of the gains and losses from the fair value measurement of derivatives are recognized in equity until the underlying transaction occurs. These amounts are only reclassified from equity and carried to the income statement after accounting for the underlying transactions. Amounts reclassified to the income statement are either recognized in the operating result, or in the financial result in the case of financial transactions.

Hedge accounting in accordance with IAS 39 was used for some hedging transactions:

The forward exchange contracts that are entered into to reduce the exchange rate risk with a total nominal volume of € 4,274.3 million primarily serve to hedge intercompany financing in foreign currency. These primarily served to hedge fluctuations in the exchange rates of the U.S. dollar (€ 1,116.0 million), the Swiss franc (€ 2,046.9 million), the Japanese yen (€ 706.4 million) and the British pound (€ 281.9 million).

Forecast transactions are only cash flow-hedged if the occurrence can be assumed to be highly probable. The nominal volume of hedged future transactions amounted to € 936.9 million as of the balance sheet date and related mainly to the hedging of future sales in U.S. dollars, Taiwanese dollars and Japanese yen as well as future costs in Swiss francs. The occurrence of hedged items is expected within the next 36 months. During the fiscal year, gains of € 53.9 million from the fair value measurement of derivatives were recognized in equity. € 20.6 million was transferred from equity to expenses.

Due to planned payments that did not materialize, cash flow hedges with a nominal volume of € 79.4 million were removed from hedge accounting in 2008. Expenses of € 10.9 million were thus recognized in the financial result.

The interest expense of the euro benchmark bond, which was issued in 2005 with a volume of € 500.0 million and a coupon of 3.75% was fixed to the six-month Euribor rate through interest rate swaps and is measured as a fair value hedge.