|
Market risk and the use of derivatives
As a company with international operations, Software
AG is active in a variety of currency zones and
therefore subject to exchange rate risks. Management
continuously monitors these risks. Financial
derivatives are used according to internal guidelines
in order to mitigate risks arising from changes
in interest rates, exchange rates or the value of
financial assets. Hedging transactions using derivatives
are only entered into to cover existing risk
positions or business events that are highly likely
to materialize.
a) Interest rate risks
The Company has an exposure to fluctuations in
interest rates. Since there are no loan liabilities,
interest rate risks apply only to cash and cash
equivalents held by the Group.
Changes in the market interest rate result in changes
in interest income due to the focus on financial
assets with short-term maturities and investments
with minimal fluctuation in value. In order to
lessen this dependency, interest rate derivatives,
primarily forward rate agreements, are used on
a limited basis. These are measured at market value;
changes in value are recognized as profit or loss.
b) Exchange rate risks
Forward currency and currency option deals are entered
into in order to hedge the risk of future fluctuations
in exchange rates. For this purpose foreign
currency receivables and payables are offset to the
extent possible and only the remaining net position
is hedged. Anticipated cash flows are also hedged
according to internal guidelines.
Hedging transactions are measured at market
value. They are reported in the balance sheet under
other assets/current liabilities. Changes in market
value of derivative financial instruments designed
to hedge future foreign currency cash flows are
reported under other reserves until such time as
the underlying transaction has been recognized in
income. The non-effective portion of a cash flow
hedge as well as changes in value of hedging
transactions that do not meet the requirements
of hedge accounting are immediately included in
net income for the current year.
c) Risks of changes in value
In line with Group policy, assets are controlled in
such a manner in terms of maturity, interest type
and rating, that no noteworthy fluctuations in
value are expected in the Company’s view.
d) Credit risk
Software AG is exposed to default risk if contracting
parties fail to meet their obligations. All financial
instruments are transacted with banks with
excellent credit ratings. The default risk of our
business partners is considered to be extremely
low.
|
