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Last Update: 03/12/2009
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Part of the audited Consolidated Financial Statements and Management´s Analysis

Market risks

Foreign currency risks: Changes in exchange rates could lead to negative changes in the value of financial instruments and adverse changes in future cash flows from planned transactions. Foreign currency risks from financial instruments result for BASF from the conversion of financial receivables, loans, securities, cash, as well as financial liabilities into the functional currency of the respective Group company. Foreign currency contracts in a variety of currencies are used to hedge foreign exchange risks from primary financial instruments and planned transactions.

The foreign currency risk exposure corresponds to the net amount of the nominal volume of the primary and derivative financial instruments which are exposed to currency risk. In addition, all planned purchase and sales transactions of the respective following year are included, if they fall under the currency risk management system. Opposite positions in the same currency are offset against each other. Companies whose functional currency is not the euro can be exposed to foreign currency risks arising from the euro.

The sensitivity analysis is conducted by simulating a depreciation by 10% of all currencies against the respective functional currency and quantifying the effect on BASF’s income before taxes and minority interests. This sensitivity of these instruments amounted to €(244) million on December 31, 2008 (December 31, 2007: €(29) million).

Due to the use of options to hedge currency risks, the sensitivity analysis is not a linear function of the assumed changes in exchange rates.

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Foreign currency risk exposure (million €)

 

 

2008

 

2007

U.S. dollar

(40)

 

(120)

Swiss franc

1,948

 

.

Pound sterling

91

 

39

Euro

158

 

(3)

Other

85

 

251

 

2,242

 

167

Interest rate risks: Interest rate risk results 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 this risk, interest rate swaps and combined interest rate and currency derivatives are used. These risks are relevant to the financing activities of BASF, however, they are not of material significance for BASF’s operating activities.

An increase in all relevant interest rates by one percentage point on December 31, 2007 and 2008, would have lowered income before taxes and minority interests by €43 million. The sensitivity of stockholders’ equity to changes in interest rates is not material.

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Carrying amount of non-derivative interest-bearing financial instruments
(million €)

 

 

2008

 

2007

 

Fixed
interest rate

Variable
interest rate

 

Fixed
interest rate

Variable
interest rate

Loans

98

303

 

628

127

Securities

6

26

 

16

4

Financial indebtedness

11,940

2,574

 

8,055

2,047

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Nominal and fair value of interest rate and combined interest and cross currency swaps (million €)

 

 

 

2008

 

2007

 

Nominal value

Fair value

 

Nominal
value

Fair value

Interest rate swaps

150

(3)

 

296

(11)

Thereof payer swaps

150

(3)

 

166

(10)

Thereof receiver swaps

 

130

(1)

Combined interest and cross
currency swaps

384

31

 

63

(5)

Thereof fixed rate

326

27

 

18

.

Thereof variable rate

58

4

 

45

(5)

Equity price risks: BASF holds shares in listed companies and mutual stock funds as a vehicle for investing liquid funds and, to a limited extent, with a view to taking strategic stakes in companies. They are included under participations, long-term and short-term securities, and are classified as available-for-sale in the BASF Group. A decline in all relevant stock prices by 10% would have lowered stockholders’ equity by €84 million on December 31, 2008 (December 31, 2007: €78 million), before taking income taxes into consideration.

Commodity price risks: Some of BASF’s divisions are occasionally exposed to strong fluctuations in raw material prices. These result primarily from the following raw materials: naphtha, propylene, benzene, titanium dioxide, cyclohexane, methanol, natural gas, butadiene, LPG Condensate, ammonia and precious metals. BASF takes the following measures to reduce price risks associated with the purchase of raw materials:

BASF uses commodity derivatives to hedge the risks from the volatility of raw material prices. These are primarily options and swaps on crude oil, oil products and natural gas.

In order to secure margins, the Oil & Gas segment uses commodity derivatives, primarily swaps and options, in natural gas trading. Risks to margins arise in volatile markets when purchase and sales contracts are priced differently.

The Catalysts division enters into both short-term and long-term purchase contracts with precious metal producers. It also buys precious metals on spot markets from a variety of business partners. The price risk from precious metals purchased to be sold on to third parties, or for use in the production of catalysts, are hedged using derivative instruments. Forward contracts are primarily used and they are settled by entering into offsetting contracts or by delivering the precious metals. In addition, the Catalysts division also holds limited unhedged precious metal positions, which could also include derivatives, for trading on its own account. The value of these positions is exposed to market price volatility and is subject to constant monitoring.

BASF is exposed to price risk as a result of holding commodity derivatives and precious metal trading positions. The valuation of commodity derivatives and precious metal trading positions at fair value means that adverse changes in market prices could negatively affect the earnings and equity of BASF.

BASF performs “Value-at-Risk” analyses for all commodity derivatives and precious metals trading positions. Using the value-at-risk analysis, we continually quantify market risk and forecast the maximum possible loss within a given confidence interval over a defined period. Our value at risk calculation is based on a confidence interval of 95% and a holding period of one day. The use of a confidence interval of 95% means that the maximum loss does not exceed the value-at-risk in a one-day period with a probability of 95%. BASF uses the variance-covariance approach.

BASF uses value at risk as a supplement to other risk management tools. We also use volume-based, exposure and stop loss limits.

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Exposure to commodity derivatives (million €)

 

 

 

2008

 

2007

 

Exposure

Value at
Risk

 

Exposure

Value at
Risk

Crude oil, oil products and natural gas

230

49

 

72

5

Precious metals

20

1

 

40

1

Swaps on CO2 emissions certificates

10

1

 

19

1

 

260

51

 

131

7

The exposure corresponds to the net amount of all long and short positions of the respective commodity category.
Further information regarding financial risks and BASF’s risk management can be found in BASF Management‘s Analysis, “Risk Report”.

Swaps in which various types of CO2 certificates are swapped are entered into in connection with CO2 emissions trading. The goal of these transactions is to exploit market price differences. These deals are settled by physical delivery.

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