INTEREST RATE RISK AND INTEREST RATE MANAGEMENT

The fair value of interest rate hedging instruments was calculated on the basis of discounted expected future cash flows using Corporate Treasury’s risk management system.

As at 31 December 2011, the Group had entered into interest rate swaps with a notional volume of €1,005 million (previous year: €1,005 million). The fair value of this interest rate swap position was €48 million (previous year: €71 million). As in the previous year, there were no interest rate options at the reporting date.

The share of instruments with short-term interest lock-ins did not change significantly during the course of 2011. Financial liabilities with short-term interest lock-ins currently represent 55% of total financial liabilities. The effect of interest rate changes on the Group’s financial position remains insignificant. Fixed-income financial liabilities in connection with the planned Postbank sale are not included in this analysis as these liabilities are paid in Postbank shares and therefore no interest rate risk arises.

The quantitative risk data relating to interest rate risk required by IFRS 7 is presented in the form of a sensitivity analysis. This method determines the effects of hypothetical changes in market interest rates on interest income, interest expense and equity as at the reporting date. The following assumptions are used as a basis for the sensitivity analysis:

Primary variable-rate financial instruments are subject to interest rate risk and must therefore be included in the sensitivity analysis. Primary variable-rate financial instruments that were transformed into fixed-income financial instruments using cash flow hedges are not included. Changes in market interest rates for derivative financial instruments used as a cash flow hedge affect equity by changing fair values and must therefore be included in the sensitivity analysis. Fixed-income financial instruments measured at amortised cost are not subject to interest rate risk.

Designated fair value hedges of interest rate risk are not included in the analysis because the interest-related changes in fair value of the hedged item and the hedging transaction almost fully offset each other in profit or loss for the period. Only the variable portion of the hedging instrument affects net financial income/net finance costs and must be included in the sensitivity analysis.

If the market interest rate level as at 31 December 2011 had been 100 basis points higher, net finance costs would have increased by €8 million (previous year: increased by €4 million). A market interest rate level 100 basis points lower would have had the opposite effect. A change in the market interest rate level by 100 basis points would affect the fair values of the interest rate derivatives recognised in equity. A rise in interest rates in this financial year would not have increased equity (previous year: €0 million), nor would a reduction have reduced equity (previous year: €0 million).

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