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QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
The
average exchange rate of the US dollar in 2005 was slightly weaker against the
Euro, Canadian dollar and several other currencies in Latin America and Eastern
Europe than in 2004. The total positive currency effect on net sales growth was
one percentage point. | | MARKET
RISK: Novartis is exposed to market risk, primarily related to foreign
exchange, interest rates and the market value of the investments of liquid funds.
The Group actively monitors these exposures. To manage the volatility relating
to these exposures, the Group enters into a variety of derivative financial instruments.
The Group’s objective is to reduce, where it deems appropriate to do so, fluctuations
in earnings and cash flows associated with changes in interest rates, foreign
currency rates and market rates of investments of liquid funds. It is the Group’s
policy and practice to use derivative financial instruments to manage exposures
and to enhance the yield on the investment of liquid funds. It does not enter
any financial transactions containing a risk that cannot be quantified at the
time the transaction is concluded. The Group only sells existing assets or enters
into transactions and future transactions (in the case of anticipatory hedges)
that it confidently expects it will have in the future, based on past experience.
In the case of liquid funds, the Group writes call options on assets it has or
it writes put options on positions it wants to acquire and has the liquidity to
acquire. The Group expects that any loss in value for these instruments generally
would be offset by increases in the value of the underlying transactions.
FOREIGN EXCHANGE RATES: The Group uses the
US dollar as its reporting currency. As a result, the Group is exposed to foreign
exchange movements, primarily in European, Japanese and other Asian and Latin
American currencies. Consequently, it enters into various contracts that reflect
the changes in the value of foreign exchange rates to preserve the value of assets,
commitments and anticipated transactions. Novartis also uses forward contracts
and foreign currency option contracts to hedge certain anticipated net revenues
in foreign currencies. Net investments in foreign
countries are long-term investments. Their fair value changes through movements
of the currency exchange rates. In the very long term, however, the difference
in the inflation rate should match the exchange rate movement, so that the market
value of the non-monetary assets abroad will compensate for the change due to
currency movements. For this reason, the Group only in exceptional cases hedges
the net investments in foreign subsidiaries. | |
