DE LA EVALUACIÓN DEL APRENDIZAJE

The Group is exposed to various financial risks arising from its underlying operations and corporate finance activities. The Group’s financial risk exposures are predominantly related to changes in foreign exchange rates, interest rates and equity prices as well as the creditworthiness and solvency of the Group’s counterparties. The Group’s subsidiaries Genentech and Chugai have their own treasury operations. These have operational independence, whilst working within a financial risk management framework that is consistent with the rest of the Group. More information on their financial risks is available in the annual reports of Genentech and Chugai. Financial risk management within the Group is governed by policies and guidelines approved by senior management. These policies and guidelines cover foreign exchange risk, interest rate risk, market risk, credit risk and liquidity risk. Group policies and guidelines also cover areas such as cash management, investment of excess funds and the raising of short- and long-term debt. Compliance with the policies and guidelines is managed by segregated functions within the Group.

The objective of financial risk management is to contain, where deemed appropriate, exposures in the various types of financial risks mentioned above in order to limit any negative impact on the Group’s results and financial position.

The Group actively measures, monitors and manages its financial risk exposures by various functions pursuant to segregation-of-duties principles.

In accordance with its financial risk policies, the Group manages its market risk exposures through the use of financial instruments such as derivatives, when deemed appropriate. It is the Group’s policy and practice not to enter into derivative transactions for trading or speculative purposes, nor for purposes unrelated to the underlying business.

Foreign exchange risk

The Group operates across the world and is exposed to movements in foreign currencies affecting its net income and financial position, as expressed in Swiss francs. The Group actively monitors its currency exposures and, when appropriate, enters into transactions with the aim of preserving the value of assets, commitments and anticipated transactions. The Group uses forward contracts, foreign exchange options and cross-currency swaps to hedge certain committed and anticipated foreign exchange flows and financing transactions.

Transaction exposure arises because the amount of local currency paid or received for transactions denominated in foreign currencies may vary due to changes in exchange rates. Similarly, transaction exposure arises on net balances of monetary assets held in foreign currencies. For many Group companies revenues and operating expenses are primarily in the local currency. At local level, the Group companies manage this exposure, if necessary, by means of financial instruments such as options and forward contracts. In addition, Group Treasury monitors total worldwide exposure on a monthly basis.

Translation exposure arises from the consolidation of the foreign currency denominated financial statements of the Group’s foreign subsidiaries. The effect on the Group’s consolidated equity is shown as a currency translation movement. The Group partially hedges net investments in foreign currencies by taking out foreign currency loans or issuing foreign currency denominated debt instruments. Major translation exposures are monitored regularly.

Roche Group Notes to the Roche Group Consolidated Financial Statements

A significant part of the Group’s cash outflows for research, development, production and administration is denominated in Swiss francs, while a much smaller proportion of the Group’s cash inflows are Swiss franc denominated. As a result, an increase in the value of the Swiss franc relative to other currencies has an adverse impact on consolidated net income. Similarly, a relative decrease in the value of the Swiss franc has a favourable effect on results when reported in Swiss francs.

Interest rate risk

Interest rate risk arises from movements in interest rates which could have effects on the Group’s net income or financial position. Changes in interest rates may cause variations in interest income and expenses resulting from interest-bearing assets and liabilities. In addition, they can affect the market value of certain financial assets, liabilities and instruments as described in the following section on market risk of financial assets. The interest rates on the Group’s major debt instruments are fixed, as described in Note 30. The Group uses interest rate derivatives to manage its interest rate risk.

Market risk of financial assets

Changes in the market value of certain financial assets and derivative instruments can affect the net income or financial position of the Group. Financial long-term assets are held for strategic purposes and marketable securities are held for fund management purposes. The risk of loss in value is managed by reviews prior to investing and continuous monitoring of the performance of investments and changes in their risk profile. Investments in equities, bonds, debentures and other fixed income instruments are entered into on the basis of guidelines with regard to liquidity and credit rating.

Credit risk

Credit risk arises from the possibility that the counterparty to a transaction may be unable or unwilling to meet their obligations causing a financial loss to the Group. Trade receivables are subject to a policy of active risk management which focuses on the assessment of country risk, credit availability, ongoing credit evaluation and account monitoring procedures. Except as noted below, there are no significant concentrations within trade receivables of counterparty credit risk due to the Group’s large number of customers and their wide geographical spread. For some credit exposures in critical countries, the Group has obtained credit insurance. Country risk exposures are continuously monitored. The exposure of other financial assets to credit risk is controlled by setting a policy for limiting credit exposure to high-quality counterparties, regular reviews of credit ratings, and setting defined limits for each counterparty. Where appropriate to reduce exposure, netting agreements under an ISDA (International Swaps and Derivatives Association) master agreement are signed with the respective counterparties. The maximum exposure to credit risk resulting from financial activities, without considering netting agreements, is equal to the carrying amount of financial assets plus the positive fair value of derivative instruments. The credit exposure is diversified amongst different counterparties.

At 31 December 2006 the Group’s combined trade accounts receivable balance with three US national wholesale distributors, AmerisourceBergen Corp., Cardinal Health, Inc. and McKesson Corp., was equivalent to 1.5 billion Swiss francs representing 17% of the Group’s consolidated trade accounts receivable (2005: 1.1 billion Swiss francs representing 14%).

Liquidity risk

Group companies require sufficient availability of cash to meet their obligations. Individual companies are generally responsible for their own cash management, including the short-term investment of cash surpluses and the raising of loans to cover cash deficits, subject to guidance by the Group and, in certain cases, to approval at Group level. The Group maintains sufficient reserves of cash and readily realisable marketable securities to meet its liquidity requirements at all times. In addition, the strong international creditworthiness of the Group provides the ability to efficiently use international capital markets for financing purposes. The Group has unused committed credit lines with various financial institutions totalling 4.3 billion Swiss francs. This includes a syndicated credit facility of 2.5 billion euros and bank commitment lines of 30 billion Japanese yen at Chugai.

Roche Group

Notes to the Roche Group Consolidated Financial Statements