The international nature of our business activities results in deliveries and payments in various currencies. Currency exchange fluctuations involve the risk of losses because assets denominated in currencies with a falling exchange rate lose value, while liabilities denominated in currencies with a rising exchange rate become more expensive. At Continental the net exposure, calculated primarily by offsetting exports against imports in the individual currencies, is regularly recorded and measured. For many years now, we have been using natural hedges to reduce currency risks. These hedges are aimed at keeping the difference between income and expenses in any one currency as low as possible, thus minimizing the effect of exchange rate fluctuations against the euro. We also monitor and analyze expected exchange rate developments. Exchange rate risks are hedged as necessary using appropriate financial instruments. Currency management sets tight limits for open positions and thus considerably reduces the hedging risk. For hedging, we only allow the use of those derivative financial instruments that can be reported and measured in the risk management system. The corporation’s net foreign investments are generally not hedged against exchange rate fluctuations. Our imports into the Eurozone generally exceed exports to other currency zones.

Variable interest agreements for liabilities pose the risk of rising interest rates. These risks are monitored and evaluated as part of our interest rate management activities and managed by means of derivative interest rate hedging instruments. The corporation’s interest-bearing liabilities are the subject of these activities. All interest rate hedges serve exclusively to manage identified interest rate risks. In 2008, extensive hedging of tranche C of the €13.5 billion syndicated loan facility arranged in 2007 and due for maturity in 2012 was carried out in order to mitigate the interest rate risk in the long term. Altogether €3.15 billion was hedged at an average rate of 4.19%. It remains our aim to keep around 50% of total borrowings at a fixed and 50% at a variable interest rate.

The Continental Corporation is not exposed to a risk of fluctuation in the fair value of long-term, fixed interest rate financial liabilities due to changes in market interest rates, as the lenders cannot exercise any right to early repayment due to rate fluctuations.

To reduce counterparty risk, interest rate and currency management transactions are only entered into with selected banks. The counterparties undergo credit analysis on an ongoing basis. We minimize internal settlement risks by clearly segregating functional areas. The central controlling function regularly determines and monitors forecasted surpluses or shortages in individual currencies from the operating business throughout the corporation. A liquidity forecast is prepared by central cash management on a regular basis.