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36.4. Market risk

4.1 Hedging policy and financial derivatives

During the course of its general business activities, the Volkswagen Group is exposed to foreign currency, interest rate, commodity price, equity price and fund price risk. Corporate policy is to limit such risk by means of hedging. Generally, all necessary hedging transactions are executed or coordinated centrally by Group Treasury; exceptions include the MAN Energy Solutions, Porsche Holding Salzburg and TRATON GROUP subgroups and the Financial Services Division, as well as some regions such as South America.

DISCLOSURES ON GAINS AND LOSSES FROM FAIR VALUE HEDGES

Fair value hedges involve hedging against the risk of changes in the carrying amount of balance sheet items. As of the reporting date, both hedging instruments and hedged items are measured at fair value in relation to the hedged risk, and the resulting changes in value are recognized on a net basis in the corresponding income statement item.

The following table shows the gains and losses from fair value hedges by risk type:

DISCLOSURES ON GAINS AND LOSSES FROM FAIR VALUE HEDGES

€ million

 

Dec. 31, 2021

 

Dec. 31, 2020

 

 

 

 

 

Hedging interest rate risk

 

 

 

 

Other operating result

 

1

 

–43

Hedging currency risk

 

 

 

 

Other operating result

 

–42

 

–12

Combined interest rate and currency risk hedging

 

 

 

 

Other operating result

 

0

 

0

DISCLOSURES ON GAINS AND LOSSES FROM CASH FLOW HEDGES

Cash flow hedges are used to hedge against risks of fluctuations in future cash flows. These cash flows may arise from a recognized asset or liability, or from a highly probable forecast transaction. The following table shows the gains and losses from cash flow hedges by risk type:

DISCLOSURES ON GAINS AND LOSSES FROM CASH FLOW HEDGES

€ million

 

2021

 

2020

 

 

 

 

 

Hedging interest rate risk

 

 

 

 

Gains or losses from changes in fair value of hedging instruments within hedge accounting

 

 

 

 

Recognized in equity

 

94

 

–46

Recognized in profit or loss

 

3

 

0

Reclassification from the cash flow hedge reserve to profit or loss

 

 

 

 

Due to early discontinuation of the hedging relationships

 

 

Due to realization of the hedged item

 

4

 

–1

Hedging currency risk

 

 

 

 

Gains or losses from changes in fair value of hedging instruments within hedge accounting

 

 

 

 

Recognized in equity

 

–2,365

 

1,434

Recognized in profit or loss

 

–3

 

–5

Reclassification from the cash flow hedge reserve to profit or loss

 

 

 

 

Due to early discontinuation of the hedging relationships

 

–5

 

–15

Due to realization of the hedged item

 

692

 

69

Combined interest rate and currency risk hedging

 

 

 

 

Gains or losses from changes in fair value of hedging instruments within hedge accounting

 

 

 

 

Recognized in equity

 

–39

 

38

Recognized in profit or loss

 

5

 

–6

Reclassification from the cash flow hedge reserve to profit or loss

 

 

 

 

Due to early discontinuation of the hedging relationships

 

 

Due to realization of the hedged item

 

39

 

–19

Hedging commodities price risk

 

 

 

 

Gains or losses from changes in fair value of hedging instruments within hedge accounting

 

 

 

 

Recognized in equity

 

0

 

0

Recognized in profit or loss

 

 

Reclassification from the cash flow hedge reserve to profit or loss

 

 

 

 

Due to early discontinuation of the hedging relationships

 

 

Due to realization of the hedged item

 

0

 

–1

The table presents effects taken to equity, reduced by deferred taxes.

The gain or loss from changes in the fair value of hedging instruments used in hedge accounting corresponds to the basis for determining hedge ineffectiveness. The ineffective portion of a cash flow hedge is the income or expense resulting from changes in the fair value of the hedging instrument that exceed the changes in the fair value of the hedged item. This hedge ineffectiveness is attributable to differences in the parameters for the hedging instrument and the hedged item. Such income and expenses are recognized in other operating income/expenses or in the financial result.

The Volkswagen Group uses two different methods to present market risk from nonderivative and derivative financial instruments in accordance with IFRS 7. For quantitative risk measurement, interest rate and foreign currency risk in the Volkswagen Financial Services subgroup is measured using a value-at-risk (VaR) model on the basis of a historical simulation, while market risk in the other Group companies is determined using a sensitivity analysis. The value-at-risk calculation indicates the size of the maximum potential loss on the portfolio as a whole within a time horizon of 40 days, measured at a confidence level of 99%. To provide the basis for this calculation, all cash flows from nonderivative and derivative financial instruments are aggregated into an interest rate gap analysis. The historical market data used in calculating value at risk covers a period of 1,000 trading days. The sensitivity analysis calculates the effect on equity and profit or loss by modifying risk variables within the respective market risks.

DISCLOSURES ON HEDGING INSTRUMENTS IN HEDGE ACCOUNTING

The Volkswagen Group regularly enters into hedging instruments to hedge against changes in the carrying amount of balance sheet items. The summary below shows the notional amounts, fair values and base variables for determining the ineffectiveness of hedging instruments entered into to hedge against the risk of changes in carrying amounts in fair value hedges:

DISCLOSURES ON HEDGING TRANSACTIONS IN FAIR VALUE HEDGES IN 2021

€ million

 

Notional amount

 

Other assets

 

Other liabilities

 

Fair value changes to determine hedge ineffective­ness

 

 

 

 

 

 

 

 

 

Hedging interest rate risk

 

 

 

 

 

 

 

 

Interest rate swaps

 

37,589

 

380

 

244

 

26

Hedging currency risk

 

 

 

 

 

 

 

 

Currency forwards, currency options, cross-currency swaps

 

5,536

 

67

 

92

 

–112

Combined interest rate and currency risk hedging

 

 

 

 

 

 

 

 

Cross-currency interest rate swaps

 

 

 

 

DISCLOSURES ON HEDGING TRANSACTIONS IN FAIR VALUE HEDGES IN 2020

€ million

 

Notional amount

 

Other assets

 

Other liabilities

 

Fair value changes to determine hedge ineffective­ness

 

 

 

 

 

 

 

 

 

Hedging interest rate risk

 

 

 

 

 

 

 

 

Interest rate swaps

 

34,2481

 

819

 

141

 

7131

Hedging currency risk

 

 

 

 

 

 

 

 

Currency forwards, currency options, cross-currency swaps

 

6,433

 

56

 

79

 

1

Combined interest rate and currency risk hedging

 

 

 

 

 

 

 

 

Cross-currency interest rate swaps

 

48

 

2

 

 

2

1

Prior-year figures adjusted.

In addition, hedging instruments are entered into to hedge against the risk of fluctuations in future cash flows. The table below shows the notional amounts, fair values and base variables for determining the ineffectiveness of hedging instruments designated as cash flow hedges:

DISCLOSURES ON HEDGING TRANSACTIONS IN CASH FLOW HEDGES IN 2021

€ million

 

Notional amount

 

Other assets

 

Other liabilities

 

Fair value changes to determine hedge ineffective­ness

 

 

 

 

 

 

 

 

 

Hedging interest rate risk

 

 

 

 

 

 

 

 

Interest rate swaps

 

17,009

 

82

 

39

 

50

Hedging currency risk

 

 

 

 

 

 

 

 

Currency forwards and cross-currency swaps

 

107,677

 

1,277

 

2,609

 

–925

Currency options

 

23,852

 

109

 

183

 

–31

Combined interest rate and currency risk hedging

 

 

 

 

 

 

 

 

Cross-currency interest rate swaps

 

1,289

 

4

 

34

 

–28

DISCLOSURES ON HEDGING TRANSACTIONS IN CASH FLOW HEDGES IN 2020

€ million

 

Notional amount

 

Other assets

 

Other liabilities

 

Fair value changes to determine hedge ineffective­ness

 

 

 

 

 

 

 

 

 

Hedging interest rate risk

 

 

 

 

 

 

 

 

Interest rate swaps

 

13,461

 

1

 

96

 

–93

Hedging currency risk

 

 

 

 

 

 

 

 

Currency forwards and cross-currency swaps

 

84,862

 

1,866

 

1,174

 

1,824

Currency options

 

19,021

 

347

 

74

 

132

Combined interest rate and currency risk hedging

 

 

 

 

 

 

 

 

Cross-currency interest rate swaps

 

1,607

 

43

 

40

 

2

The change in the fair value to determine ineffectiveness corresponds to the change in fair value of the designated component.

DISCLOSURES ON HEDGED ITEMS IN HEDGE ACCOUNTING

In addition to disclosures on hedging instruments, disclosures are also required on the hedged items, broken down by risk category and type of designation for hedge accounting. Below follows a list of hedged items designated in fair value hedges, separately from those designated in cash flow hedges:

DISCLOSURES ON HEDGED ITEMS IN FAIR VALUE HEDGES IN 2021

€ million

 

Carrying amount

 

Cumulative hedge adjustments

 

Hedge adjustments current period/fiscal year

 

Cumulative hedge adjustments from discontinued hedging relationships

 

 

 

 

 

 

 

 

 

Hedging interest rate risk

 

 

 

 

 

 

 

 

Financial services receivables

 

 

 

 

Other financial assets

 

 

 

 

Financial liabilities

 

39,751

 

281

 

–668

 

Hedging currency risk

 

 

 

 

 

 

 

 

Financial services receivables

 

 

 

 

Other financial assets

 

593

 

11

 

11

 

Financial liabilities

 

955

 

14

 

–20

 

Combined interest rate and currency risk hedging

 

 

 

 

 

 

 

 

Financial services receivables

 

 

 

 

Other financial assets

 

 

 

 

Financial liabilities

 

 

 

 

DISCLOSURES ON HEDGED ITEMS IN FAIR VALUE HEDGES IN 2020

€ million

 

Carrying amount

 

Cumulative hedge adjustments

 

Hedge adjustments current period/fiscal year

 

Cumulative hedge adjustments from discontinued hedging relationships

 

 

 

 

 

 

 

 

 

Hedging interest rate risk

 

 

 

 

 

 

 

 

Financial services receivables1

 

 

 

 

Other financial assets

 

150

 

7

 

–17

 

Financial liabilities

 

35,924

 

873

 

423

 

Hedging currency risk

 

 

 

 

 

 

 

 

Financial services receivables

 

 

 

 

Other financial assets

 

602

 

18

 

8

 

Financial liabilities

 

951

 

30

 

–2

 

Combined interest rate and currency risk hedging

 

 

 

 

 

 

 

 

Financial services receivables

 

 

 

 

Other financial assets

 

 

 

 

Financial liabilities

 

50

 

5

 

5

 

1

Prior-year figures adjusted.

DISCLOSURES ON HEDGED ITEMS IN CASH FLOW HEDGES IN 2021

 

 

 

 

RESERVE FOR

€ million

 

Changes in fair value to determine hedge ineffective­ness

 

Active cash flow hedges

 

Discontinued cash flow hedges

 

 

 

 

 

 

 

Hedging interest rate risk

 

 

 

 

 

 

Designated components

 

49

 

47

 

–1

Non-designated components

 

 

 

Deferred taxes

 

 

–18

 

0

Total hedging interest rate risk

 

49

 

29

 

–1

Hedging currency risk

 

 

 

 

 

 

Designated components

 

–998

 

–969

 

8

Non-designated components

 

 

–500

 

–6

Deferred taxes

 

 

436

 

0

Total hedging currency risk

 

–998

 

–1,033

 

1

Combined interest rate and currency risk hedging

 

 

 

 

 

 

Designated components

 

–29

 

–1

 

Non-designated components

 

 

 

Deferred taxes

 

 

0

 

Total hedging combined interest rate and currency risk

 

–29

 

–1

 

Hedging commodity price risk

 

 

 

 

 

 

Designated components

 

 

 

Non-designated components

 

 

 

Deferred taxes

 

 

 

Total hedging commodity price risk

 

 

 

DISCLOSURES ON HEDGED ITEMS IN CASH FLOW HEDGES IN 2020

 

 

 

 

RESERVE FOR

€ million

 

Changes in fair value to determine hedge ineffective­ness

 

Active cash flow hedges

 

Discontinued cash flow hedges

 

 

 

 

 

 

 

Hedging interest rate risk

 

 

 

 

 

 

Designated components

 

–90

 

–90

 

1

Non-designated components

 

 

 

Deferred taxes

 

 

19

 

0

Total hedging interest rate risk

 

–90

 

–71

 

1

Hedging currency risk

 

 

 

 

 

 

Designated components

 

1,956

 

1,952

 

4

Non-designated components

 

 

–1,008

 

0

Deferred taxes

 

 

–299

 

–1

Total hedging currency risk

 

1,956

 

644

 

3

Combined interest rate and currency risk hedging

 

 

 

 

 

 

Designated components

 

0

 

–1

 

Non-designated components

 

 

 

Deferred taxes

 

 

0

 

Total hedging combined interest rate and currency risk

 

0

 

–1

 

Hedging commodity price risk

 

 

 

 

 

 

Designated components

 

 

 

0

Non-designated components

 

 

 

Deferred taxes

 

 

 

0

Total hedging commodity price risk

 

 

 

0

CHANGES IN THE RESERVE

When accounting for cash flow hedges, the designated effective portions of a hedging relationship are recognized in OCI I. Any changes in excess of the fair value of the designated component are recognized as ineffectiveness through profit or loss.

The tables below show a reconciliation to the reserve:

CHANGES IN THE RESERVE FOR CASH FLOW HEDGES (OCI I)

€ million

 

Interest rate risk

 

Currency risk

 

Interest rate/currency risk

 

Commodity price risk

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at Jan. 1, 2021

 

–70

 

1,355

 

–1

 

0

 

1,284

Gains or losses from effective hedging relationships

 

94

 

–1,932

 

–39

 

0

 

–1,877

Reclassifications due to changes in whether the hedged item is expected to occur

 

 

–5

 

 

 

–5

Reclassifications due to realization of the hedged item

 

4

 

–83

 

39

 

0

 

–40

Balance at Dec. 31, 2021

 

28

 

–665

 

–1

 

 

–637

CHANGES IN THE RESERVE FOR CASH FLOW HEDGES (OCI I)

€ million

 

Interest rate risk

 

Currency risk

 

Interest rate/currency risk

 

Commodity price risk

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at Jan. 1, 2020

 

–23

 

135

 

–20

 

1

 

93

Gains or losses from effective hedging relationships

 

–46

 

1,984

 

38

 

0

 

1,976

Reclassifications due to changes in whether the hedged item is expected to occur

 

 

–41

 

 

 

–41

Reclassifications due to realization of the hedged item

 

–1

 

–724

 

–19

 

–1

 

–744

Balance at Dec. 31, 2020

 

–70

 

1,355

 

–1

 

0

 

1,284

If expectations about the occurrence of the hedged item change, the arrangement is reclassified by terminating the hedging relationship prematurely. Changed expectations are primarily caused by a change in projections for hedging sales revenue.

Changes in the fair values of non-designated components of a derivative are likewise generally recognized immediately through profit or loss. An exception from this principle is any change in the fair value attributable to non-designated time values of options, to the extent that they relate to the hedged item. Moreover, the Volkswagen Group initially recognizes in equity (hedging costs) changes in the fair values of non-designated forward components in currency forwards and currency hedges attributed to cash flow hedges. This means that the Volkswagen Group recognizes changes in the fair value of the non-designated component or parts thereof immediately through profit or loss only if there is ineffectiveness.

The tables below show a summary of changes in the reserve for hedging costs resulting from the non-designated portions of options and currency hedges:

CHANGES IN THE RESERVE FOR HEDGING COSTS – NON-DESIGNATED TIME VALUES OF OPTIONS

 

 

CURRENCY RISK

€ million

 

2021

 

2020

 

 

 

 

 

Balance at Jan. 1

 

59

 

–35

Gains and losses from non-designated time value of options

 

 

 

 

Hedged item is recognized at a point in time

 

–171

 

50

Reclassifications due to changes in whether the hedged item is expected to occur

 

 

 

 

Hedged item is recognized at a point in time

 

0

 

0

Reclassification due to realization of the hedged item

 

 

 

 

Hedged item is recognized at a point in time

 

32

 

43

Balance at Dec. 31

 

–80

 

59

CHANGES IN THE RESERVE FOR HEDGING COSTS – NON-DESIGNATED FORWARD COMPONENT AND CROSS CURRENCY BASIS SPREAD (CCBS)

 

 

CURRENCY RISK

€ million

 

2021

 

2020

 

 

 

 

 

Balance at Jan. 1

 

–766

 

–942

Gains and losses from non-designated forward elements and CCBS

 

 

 

 

Hedged item is recognized at a point in time

 

–263

 

–600

Reclassification due to changes in whether the hedged item is expected to occur

 

 

 

 

Hedged item is recognized at a point in time

 

0

 

26

Reclassifications due to realization of the hedged item

 

 

 

 

Hedged item is recognized at a point in time

 

742

 

749

Balance at Dec. 31

 

–287

 

–766

4.2 Market risk in the Volkswagen Group (excluding Volkswagen Financial Services subgroup)

4.2.1 Foreign currency risk

Foreign currency risk in the Volkswagen Group (excluding Volkswagen Financial Services subgroup) is attributable to investments, financing measures and operating activities. Currency forwards, currency options, currency swaps and cross-currency interest rate swaps are used to limit foreign currency risk. These transactions relate to the exchange rate hedging of material payments covering general business activities that are not made in the functional currency of the respective Group companies. The principle of matching currencies applies to the Group’s financing activities.

Hedging transactions entered into in 2021 as part of foreign currency risk management were amongst others in Australian dollars, Brazilian real, British pound sterling, Chinese renminbi, Hong Kong dollars, Indian rupees, Japanese yen, Canadian dollars, Mexican pesos, Norwegian kroner, Polish zloty, Russian rubles, Swedish kronor, Swiss francs, Singapore dollars, South African rand, South Korean won, Taiwan dollars, Czech koruna, Hungarian forints and US dollars.

All nonfunctional currencies in which the Volkswagen Group enters into financial instruments are included as relevant risk variables in the sensitivity analysis in accordance with IFRS 7.

If the functional currencies concerned had appreciated or depreciated by 10% against the other currencies, the exchange rates shown below would have resulted in the following effects on the hedging reserve in equity and on earnings after tax. It is not appropriate to add together the individual figures, since the results of the various functional currencies concerned are based on different scenarios.

The following table shows the sensitivities of the main currencies in the portfolio as of December 31, 2021:

 

 

DEC. 31, 2021

 

DEC. 31, 2020

€ million

 

+10%

 

–10%

 

+10%

 

–10%

 

 

 

 

 

 

 

 

 

Exchange rate

 

 

 

 

 

 

 

 

EUR / GBP

 

 

 

 

 

 

 

 

Hedging reserve

 

1,737

 

–1,745

 

951

 

–947

Earnings after tax

 

–78

 

80

 

–59

 

59

EUR / CNY

 

 

 

 

 

 

 

 

Hedging reserve

 

1,029

 

–1,128

 

520

 

–477

Earnings after tax

 

–157

 

157

 

–114

 

114

EUR / USD

 

 

 

 

 

 

 

 

Hedging reserve

 

233

 

–224

 

168

 

–75

Earnings after tax

 

–672

 

666

 

–527

 

527

EUR / CHF

 

 

 

 

 

 

 

 

Hedging reserve

 

574

 

–592

 

454

 

–442

Earnings after tax

 

17

 

–19

 

–4

 

4

EUR / SEK

 

 

 

 

 

 

 

 

Hedging reserve

 

311

 

–312

 

287

 

–287

Earnings after tax

 

–82

 

81

 

–78

 

78

EUR / AUD

 

 

 

 

 

 

 

 

Hedging reserve

 

284

 

–283

 

172

 

–172

Earnings after tax

 

–13

 

13

 

–22

 

22

EUR / CAD

 

 

 

 

 

 

 

 

Hedging reserve

 

209

 

–211

 

123

 

–117

Earnings after tax

 

–24

 

24

 

–11

 

11

EUR / JPY

 

 

 

 

 

 

 

 

Hedging reserve

 

200

 

–193

 

280

 

–274

Earnings after tax

 

–27

 

27

 

–32

 

32

EUR / TWD

 

 

 

 

 

 

 

 

Hedging reserve

 

136

 

–136

 

75

 

–75

Earnings after tax

 

–6

 

6

 

–10

 

10

EUR / KRW

 

 

 

 

 

 

 

 

Hedging reserve

 

124

 

–124

 

114

 

–114

Earnings after tax

 

–18

 

18

 

–55

 

55

EUR / PLN

 

 

 

 

 

 

 

 

Hedging reserve

 

–93

 

93

 

–20

 

20

Earnings after tax

 

–49

 

49

 

–37

 

37

EUR / CZK

 

 

 

 

 

 

 

 

Hedging reserve

 

89

 

–89

 

50

 

–50

Earnings after tax

 

–39

 

40

 

–31

 

31

CAD / USD

 

 

 

 

 

 

 

 

Hedging reserve

 

–102

 

102

 

–55

 

55

Earnings after tax

 

–6

 

6

 

–4

 

4

EUR / BRL

 

 

 

 

 

 

 

 

Hedging reserve

 

9

 

–9

 

3

 

–3

Earnings after tax

 

–96

 

96

 

–64

 

64

CZK / GBP

 

 

 

 

 

 

 

 

Hedging reserve

 

60

 

–60

 

109

 

–109

Earnings after tax

 

 

 

–1

 

1

4.2.2 Interest rate risk

Interest rate risk in the Volkswagen Group (excluding Volkswagen Financial Services subgroup) results from changes in market interest rates, primarily for medium- and long-term variable interest receivables and liabilities. Interest rate swaps and cross-currency interest rate swaps are sometimes entered into to hedge against this risk primarily under fair value or cash flow hedges, and depending on market conditions. Intragroup financing arrangements are mainly structured to match the maturities of their refinancing. Departures from the Group standard are subject to centrally defined limits and monitored on an ongoing basis.

Interest rate risk within the meaning of IFRS 7 is calculated for these companies using sensitivity analyses. The effects of the risk-variable market rates of interest on the financial result and on equity are presented, net of tax.

If market interest rates had been 100 bps higher as of December 31, 2021, equity would have been €43 million (previous year adjusted: €29 million) higher. If market interest rates had been 100 bps lower as of December 31, 2021, equity would have been €42 million (previous year adjusted: €29 million) lower.

If market interest rates had been 100 bps higher as of December 31, 2021, earnings after tax would have been €321 million (previous year adjusted: €266 million) lower. If market interest rates had been 100 bps lower as of December 31, 2021, earnings after tax would have been €343 million (previous year adjusted: €298 million) higher.

4.2.3 Commodity price risk

Commodity price risk in the Volkswagen Group (excluding Volkswagen Financial Services subgroup) primarily results from price fluctuations and the availability of ferrous and non-ferrous metals, precious metals, commodities required in connection with the Group’s digitalization and electrification strategy, as well as of coal, CO2 certificates and rubber.

Commodity price risk is limited by entering into forward transactions and swaps.

However, not all commodities are suitable for these types of hedges, e.g. because of low market liquidity or a lack of correlation between hedged item and hedging instrument. Likewise, selected commodities were purchased on the spot market, which led to a corresponding increase in inventories. Commodity price risk within the meaning of IFRS 7 is presented using sensitivity analyses. These show the effect on earnings after tax of changes in the risk variable commodity prices.

If the commodity prices of the hedged nonferrous metals, coal and rubber had been 10% higher (lower) as of December 31, 2021, earnings after tax would have been €679 million (previous year: €559 million) higher (lower).

4.2.4 Equity and bond price risk

The special funds launched using surplus liquidity and the equity interests measured at fair value are subject in particular to equity price and bond price risk, which can arise from fluctuations in quoted market prices, stock exchange indices and market rates of interest. The changes in bond prices resulting from variations in the market rates of interest are quantified in sections 4.2.1 and 4.2.2, as are the measurement of foreign currency and other interest rate risks arising from the special funds and the equity interests measured at fair value. As a rule, risks arising from the special funds are countered by ensuring a broad diversification of products, issuers and regional markets when investing funds, as stipulated by the Investment Guidelines of the Group. In addition, the Investment Guidelines define fixed minimum values, which are to be met by taking suitable risk management measures. In addition, exchange rates are hedged when market conditions are appropriate.

As part of the presentation of market risk, IFRS 7 requires disclosures on how hypothetical changes in risk variables affect the price of financial instruments. Potential risk variables here are in particular quoted market prices or indices, as well as interest rate changes as bond price parameters.

If share prices had been 10% higher as of December 31, 2021, earnings after tax would have been €228 million (previous year: €160 million) higher and equity would have been €5 million (previous year: €2 million) higher. If share prices had been 10% lower as of December 31, 2021, earnings after tax would have been €246 million (previous year: €179 million) lower and equity would have been €5 million (previous year: €2 million) lower.

4.3 Market risk at Volkswagen Financial Services subgroup

Exchange rate risk in the Volkswagen Financial Services subgroup is mainly attributable to assets that are not denominated in the functional currency and from refinancing within operating activities. Interest rate risk relates to refinancing without matching maturities and the varying interest rate elasticity of individual asset and liability items. The risks are limited by the use of currency and interest rate hedges.

Microhedges are used for interest rate hedging. Fixed-rate assets and liabilities included in the hedging strategy are recognized at fair value, as opposed to their original subsequent measurement at amortized cost. The resulting effects in the income statement are offset by the corresponding gains and losses on the interest rate hedging instruments (swaps). Currency hedges (currency forwards and cross-currency interest rate swaps) are used to mitigate foreign currency risk. All cash flows in foreign currency are hedged.

As of December 31, 2021, the value at risk was €233 million (previous year: €213 million) for interest rate risk and €164 million (previous year: €148 million) for foreign currency risk.

The entire value at risk for interest rate and foreign currency risk at the Volkswagen Financial Services subgroup was €172 million (previous year: €170 million).