20 Financial Instruments

Primary Financial Instruments

The carrying amounts of the held-to-maturity securities correspond to their fair values. This category includes current fixed-interest securities which are valued at stock market prices on the reporting date. If no prices from an active market are currently available, and, if the fair value cannot be determined reliably, the securities are valued at cost.

The loans and receivables reported include trade receivables and other loans. Their carrying amounts correspond to their fair values. The present value of the loans corresponds to the cash value of the loans and constitutes the cash values of the cash flows expected in the future. Discounting is carried out on the basis of the interest rates which are valid on the reporting date. Available-for-sale financial assets include cash and cash equivalents, fund shares aimed at securing phased-early-retirement commitments, receivables from investment grants, and other financial receivables. The fair values of the fund shares correspond to their stock market prices on the reporting date. Cash and cash equivalents are valued at the conversion rate prevailing on the reporting date. Other financial assets are valued at cost, as no observable prices on active markets are available. The carrying amounts of the financial liabilities, trade payables, and other liabilities correspond to their fair values. The fair values of financial liabilities constitute the cash value of the cash flows expected in the future. Discounting is carried out on the basis of the interest rates which are valid on the statement of financial position date. All other liabilities are valued at cost as no observable prices for them are available.

The interest expenses contain €12.8 million (previous year: €10.4 million) from financial liabilities recognized at amortized cost. No profit was generated by the reversal of those financial instruments. Loans and receivables or financial liabilities at amortized cost in a foreign currency produced a net profit of €80.3 million (previous year: €126.0 million) and a net loss of €-79.3 million (previous year: €-127.1 million). These are reposted under other operating income and expenses. Net profits from available-for-sale financial assets originate mainly from investment income. In addition, other operating income and expenses include €2.6 million (previous year: €9.5 million) from the currency translation of cash and cash equivalents. Neither in the year under review nor in the previous year were there any reclassifications of financial assets between those recognized at amortized cost and those recognized at market value or vice versa.

Derivative Financial Instruments

WACKER is exposed to exchange rate, interest rate, and raw material price risks in the normal course of its business. The raw material price risks that it hedges against result principally from precious metals (platinum, gold, palladium) which are used as catalysts or for other purposes in the production process. In 2009, raw material market risks were not hedged using derivative financial instruments.

In those cases where WACKER hedges against these risks, it uses derivative financial instruments, in particular currency option and forward exchange contracts, and foreign exchange swaps. Derivatives are used only if they are backed by positions, cash deposits and funding, or scheduled transactions arising from operations (underlying transaction). The scheduled transactions also include anticipated, but not yet invoiced sales in foreign currencies.

Foreign exchange hedging is carried out mainly for the US dollar, the Japanese yen, and the Singapore dollar. In the case of foreign exchange hedging in the financing area, the maturities of the receivables and/or liabilities are taken into account. Interest rate hedging is carried out primarily for the euro and the US dollar, with the maturities of the underlying transactions being the most important factor.

Operational hedging in the foreign exchange area relates to the receivables and liabilities already recognized and generally encompasses time horizons of between 3 and 4 months. The time horizon of strategic hedging is between 4 and a maximum of 21 months. The hedged cash flows influence the statement of income at the time when sales are realized. The cash inflows are usually recorded shortly afterward, depending on the payment deadline. As well as receivables from and liabilities to third parties, intercompany financial receivables and liabilities are hedged.

WACKER is exposed to a credit risk where derivatives have a positive market value and counterparties to a contract are unable to render their performance. To limit the risk of default, transactions are conducted only within defined limits and with partners of extremely high credit standing. To make efficient risk management possible, the market risks within the Group are controlled centrally. The conclusion and handling of transactions comply with internal guidelines and undergo monitoring procedures that take account of the division of functions.

The market values refer to the maturity repurchase values (redemption values) of the financial derivatives as of the statement of financial position date. They are calculated on the basis of quoted prices or with the help of standard calculation methods. In the valuation of forward contracts and/or swaps, WACKER, as in the previous year, applies the zero-coupon method.

The derivatives are measured at their market values, irrespective of their stated purpose. They are reported in the statement of financial position under other assets and/or other liabilities. Where permissible, cash flow hedge accounting is applied for the strategic hedging of currency exchange risks from future foreign exchange positions. In such cases, the changes in the market values of foreign exchange contracts and the changes in the intrinsic values of currency options are recognized under equity with no effect on net income until the underlying transaction takes place. When future transactions are realized, the effects accumulated under equity will be reversed through profit and loss. The changes in the current values of the currency options are posted to the statement of income.

In the 2009 fiscal year, the accumulated income and expenses recorded directly under equity included unrealized earnings amounting to €31.7 million (before tax) (previous year: €-58.7 million).

Derivative financial instruments of which the changes in market value are recognized in profit or loss led to a net result of €– 28.3 million (previous year: €15.8 million). €– 15.0 million (previous year: €23.6 million) of this amount is attributable to derivatives from hedge accounting. In the result for the period, no gains or losses from hedge accounting ineffectivities were recorded, as the hedging relationships were almost entirely effective. These are presented under other operating income and expenses. Neither in the year under review nor in the previous year were there any reclassifications of financial assets between those recognized at amortized cost and those recognized at market value or vice versa. These are presented under other operating income and expenses.

In a small number of cases, there are embedded derivatives. These are generally measured at market values. If not derivable, they are measured at amortized cost. These too are reported under, respectively, other assets or other liabilities. The variant of these which prevails at WACKER is such that normal supply and service relationships with supplier and customers abroad were not concluded in the functional currency of one of the two contractual partners.

Depending on the nature of the underlying transaction, they are reposted in the statement of income either under other operating income and/or expenses or, if financial liabilities are being hedged, under net interest income.

The decrease in the nominal values of the foreign exchange derivatives is basically caused by two factors: lower sales in foreign currency and a reduction in hedging. The currency option transactions that were still unsettled at the end of 2009 will fall due in the course of the subsequent fiscal years (2010 and 2011).

The currency options as of the end of 2009 have a volume of US$ 38 million (puts). In addition, there are forward exchange contracts amounting to US$ 848.2 million and ¥5.15 billion.

A cross-currency swap was used as a foreign exchange hedge for an existing loan of US$70 million. It matures in 2010.

Information on the Type and Extent of Risks

The risks connected with the procurement, financing, and selling of WACKER’s products and services are described in detail in the management report. The Executive Board receives regular analyses on the extent of those risks. The analyses focus in particular on the potential impact of raw material price risks, foreign exchange risks, and interest rate risks on EBITDA and net interest income.

Foreign Exchange Risks

The evaluation of the risk potential of hedging is based on the most significant US-dollar income and expenditure. US-dollar income is taken to mean all sales invoiced in US dollars, while all US dollar purchasing as well as site costs incurred in US dollars are reported under US-dollar expenditure. In addition to the direct US-dollar income and expenditure, the evaluation of potential risks includes the indirect US-dollar impact of the main raw materials (methanol and natural gas). A us$ 0.01 increase in the exchange rate of the euro against the US dollar (corresponds to a fluctuation of 0.7%) would have a negative effect of €2.9 million (previous year: €5.3 million) on EBITDA. Foreign exchange hedging is not included in this. Increases in the euro exchange rate against the SGD and JPY, on the other hand, have only a minor impact.

Interest Rate Risk

The interest rate risk results mainly from financial debt and interest-bearing assets. Each year, the Executive Board determines the mixture of fixed and variable-interest net financial debt. Depending on the structure involved, interest rate derivatives are concluded as required. Depending on whether the instrument in question (financial liabilities, investments, interest rate derivatives) has a fixed or variable interest rate, the interest rate risks are measured on the basis of either market-value sensitivity or cash-flow sensitivity. Financial liabilities and fixed-interest investments are measured at amortized cost and are, therefore, in accordance with IFRS 7, not subject to any risk of changes in interest rates. Hedge accounting is not used for any of the interest rate derivatives. Changes in market interest rates have an impact on the net interest income generated by variable-interest financial instruments, and are, therefore, included in the calculation of earnings-related sensitivity. Changes in the market interest rates of interest rate derivatives affect the financial result, and are, therefore, included in any earnings-related sensitivity analysis. If current interest rates had been 100 base points higher (lower) on average, net interest income would have been €0.9 million (previous year: €2.1 million) higher (lower).

Liquidity Risk

The liquidity risk means that WACKER may not be able to meet its financial obligations sufficiently. To limit this risk, WACKER keeps liquid reserves in the form of current investments and credit lines. WACKER has concluded agreements with a number of banks for noncurrent syndicated loans and bilateral loan agreements. The aggregate volume of these loans is significantly higher than the planned financial liabilities.

Raw Material Price Risk

Potential combinations of factors in the natural gas or ethylene segments make it impossible to exclude the risk that the company’s supply of raw materials might be insufficient. Ethylene-related risks, however, will be reduced substantially by the EPS pipeline which is currently under construction in Germany. In general, potential increases in raw materials prices pose a risk to results. An increase of 1% would have a negative effect of €7.2 million (previous year: €9.1 million) in EBITDA.