The management of currency and interest rate risks is conducted in the Treasury department; the management of commodity price risks in the Global Procurement & Logistics competence center or through appropriately authorized Group companies. Detailed guidelines and procedures exist for dealing with financial risks. Among other things, they provide for the segregation of trading and back office functions.
Exchange rate volatility: In global markets, risks arise from the movement in exchange rate parities. On the production side, we address exchange rate risks by having our local production sites.
On the market side, there are risks arising from our customer industries.
Financial foreign currency risks result from the translation of receivables, liabilities and other monetary items in terms of IAS 21 at the closing date rate into the functional currency of the respective Group company. In addition, we incorporate planned purchase and sales transactions in foreign currencies in our financial foreign currency risk management. These risks are hedged using derivative instruments.
EXCHANGE RATE VOLATILITY
- Risk of an increasing imbalance in exchange rates
- Management on the production side through local sites
- Management on the market side through derivative instruments
Interest rate risks: Interest rate risk result from changes in prevailing market interest rates, which can cause a change in the present value of fixed-rate instruments, and changes in the interest payments of variable-rate instruments. To hedge these risks, interest rate swaps and combined interest rate and currency derivatives are used.
Risks from metal and raw materials trading: In the catalysts business, BASF employs commodity derivatives on base and precious metals and trades on behalf of third parties and on its own account. In addition, within predetermined limits and exposure constraints we use our knowledge of the markets for crude oil and oil products to generate earnings in the trade of raw materials. These activities are subject to constant monitoring.
Liquidity risks: Risks from cash flow fluctuations are recognized in a timely manner as part of our liquidity planning. The present increased uncertainties are taken into account by means of additional risk scenarios and the short-term updating of our liquidity planning. This means we can promptly take the necessary measures when required.
We issue long-term bonds to reduce refinancing risks. In addition, we also use bank loans to finance the growth of the BASF Group. In the course of the current financial and economic crisis, issuing bonds has become significantly more difficult and costly than in previous years. As a result of our good ratings, the ongoing commercial paper program and committed lines of bank credit, we have access to comprehensive liquid funds. The commercial paper program also constitutes a reliable liquidity source for BASF in the financial crisis.
Default risks: We limit country-specific risks through internal country ratings, which are continually updated to reflect changing environment conditions. We use export credit insurance and investment guarantees as the main tools to limit specific country-related risks.
We lessen credit risks for our financial investments by engaging in transactions only with business partners and banks with good credit ratings and by adhering to fixed limits. Monetary transactions are also conducted through such banks. Against the background of the current economic crisis, we continuously check the creditworthiness of our partner banks. We reduce the risk of default on receivables by continually monitoring the creditworthiness and payment behavior of customers and by setting appropriate credit limits. Risks are also limited through the use of credit insurance and bank guarantees.
More information on financial risks can be found in the Note 26 to the Consolidated Financial Statements
Pension obligations: We predominantly finance company pension obligations externally through separate pension assets. In addition to the pension plans of our Group companies in North America, this applies particularly to BASF Pensionskasse VVaG and the BASF Pensionstreuhand e.V. in Germany. We address the risk of pension plan underfunding due to market volatility of plan assets by aligning the investment strategy in terms of return and risk optimization to the structure of the pension obligations. Stress scenarios are simulated as part of the portfolio analyses. The permanent review of the investment strategy was further intensified in the wake of the financial and economic crisis. Furthermore, we are reducing this risk by increasingly offering employees defined contribution schemes.
- Currency and interest rate risks
- Risks from metal and raw materials trading
- Liquidity risks
- Credit and default risks
- Pension obligations