The main financial risks faced by DSM relate to liquidity risk and market risk (comprising interest-rate risk, currency risk and price risk). DSM’s financial policy is aimed at minimizing the effects of fluctuations in currency-exchange and interest rates on its results in the short term and following market rates in the long term. DSM uses financial derivatives to manage financial risks relating to business operations and does not enter into speculative derivative positions.

DSM has two confirmed credit facilities of €500 million and €400 million amounting to a total of €900 million (2006: also two confirmed credit facilities amounting to a total of €900 million) and a commercial-paper program amounting to €1,500 million (2006: €900 million). The USD 400 million USD commercial-paper program has been cancelled (2006: USD 400 million). The company will use the commercial-paper program to a total of not more than €900 million (2006: €900 million).

DSM’s interest rate risk policy is aimed at minimizing the interest-rate risks associated with the financing of the company and thus at the same time optimizing the net interest costs. This policy translates into a certain desired profile of fixed-interest and floating-interest positions, including cash and cash equivalents, with the floating-interest position in principle not exceeding 60% of net debt.

Floating-rate and fixed-rate borrowings analyzed by maturity are summarized below. Borrowings excluding credit institutions are shown after taking into account related interest-rate derivatives in designated hedging relationships.

On 31 December 2007, the notional amount of interest-rate swaps in relation to long-term borrowings was €170 million (2006: €590 million). For these swaps fair value hedge accounting was applied. There was no material ineffectiveness in relation to these hedges. For fair value hedges, including fair value hedges ended before 31 December 2007, an immaterial amount was recognized in the profit or loss for the year which offsets a similar amount recognized in relation to the hedged risk. Both are reported in other financial income and expense.

The following sensitivity analysis of borrowings and related financial derivatives to interest-rate movements assumes an immediate 1% change in interest rates for all currencies and maturities from their level on 31 December 2007, with all other variables held constant. As in 2006, a 1% reduction in interest rates would not result in a material change in profit and loss or equity on the basis of the composition of financial instruments on 31 December 2007, as floating-rate borrowings are balanced by floating-rate assets (mainly cash). The same applies in the case of a 1% increase in interest rates. The sensitivity of the fair value of financial instruments on 31 December 2007 to changes in interest rates is set out in the following table. For 2006 the total sensitivity of fair values ranged between +€49 million (+ 1 % interest change) and (€54) million (-1 % interest change).

Interest-rate swaps are from time to time used to hedge the fixed interest rate of a new external loan as from the future issue date (pre-hedges). In this way DSM achieves up-front certainty about the interest costs for a major part of its long-term euro debt. The 5.25% EUR loan 2007-2017 was pre-hedged for an amount of €625 million in 2006 and 2007 by means of forward-starting swaps for a locked interest rate of 4.1% (excluding credit spread). Including the unhedged €125 million and credit spread, the effective interest rate of this loan amounts to 4.89%. On 31 December 2007 no prehedges for highly probable refinancing were outstanding (the notional amount of the related interest-rate swaps at year-end 2006 was €400 million).

It is DSM’s policy to hedge 100% of the currency risks resulting from sales and purchases at the moment of recognition of the trade receivables and trade payables. In addition, operating companies may – under strict conditions – opt for hedging currency risks from firm commitments and forecast transactions. The currencies giving rise to these risks are primarily the USD, the JPY, the GBP and the CHF. The risks arising from currency exposures are regularly reviewed by the business groups and hedged when appropriate. DSM uses average-rate currency forward contracts, currency forward contracts, spot contracts, and average-rate currency options to hedge the exposure to fluctuations in foreign exchange rates. In general the instruments have maturities of less than one year.

To hedge intercompany loans, receivables and payables, denominated in currencies other than the functional currency of the subsidiaries, DSM uses currency swaps or forward contracts. Hedge accounting is not applied for these instruments. On 31 December 2007, the notional amount of the currency forward contracts was €1,556 million (2006: €1,156 million).

In 2007 DSM hedged USD 718 million (2006: USD 432 million) of its projected net cash flow in USD in 2008 (partly against CHF) by means of average-rate currency forward contracts and average-rate currency options at an average exchange rate of USD 1.40 per euro for the four quarters of 2008. In 2007 DSM also hedged JPY 5,375 million (not applicable in 2006) of its projected net cash flow in JPY in 2008 (most against CHF) by means of average-rate currency forward contracts at an average exchange rate of JPY 152.31 per euro for the four quarters of 2008. These hedges have fixed the exchange rate for part of the USD and JPY receipts in 2008. Cash flow hedge accounting is applied for these hedges. As a result of these hedges, in 2007 €27 million (2006: €6 million) was recognized in the operating income of the segments involved in accordance with the realization of the expected cash flows. There was no material ineffectiveness in relation to these hedges.

The currency risk associated with the translation of DSM’s net investment in entities denominated in currencies other than the euro is partially hedged. CHF-denominated net assets have partially been hedged by currency swaps (CHF 1,760 million). USD-denominated net assets have partially been hedged through USD loans (USD 400 million). There was no material ineffectiveness in relation to these hedges.

The following sensitivity analysis of net borrowings and derivative financial instruments to currency movements against the euro assumes a 10% change in all foreign currency rates against the euro from their level on 31 December 2007, with all other variables held constant. A +10% change indicates a strengthening of foreign currencies against the euro. A -10% change represents a weakening of foreign currencies against the euro. For 2006 the sensitivities that could impact profit and loss ranged between (€65) million (+ 10 % exchange rate change) and +€57 million (-10 % exchange rate change) whereas the sensitivities related to cash flow hedges that would impact equity ranged between (€7) million (+10 % exchange rate change) and +€4 million (-10 % exchange rate change).

The following sensitivity analysis of net borrowings and derivative financial instruments to currency movements against the euro assumes a 10% change in the USD against all foreign currencies and the euro from the level on 31 December 2007, with all other variables held constant. A +10% change indicates a strengthening of the USD and a -10% change represents a weakening of the USD. For 2006 USD sensitivities were similar.

Fair-value changes on these positions will generally be recognized in profit or loss with the exception of the instruments for which cash-flow hedge accounting or net-investment hedge accounting is applied. Cash flow hedge accounting is applied for the average rate forwards and average-rate currency options used for economic hedging; the fair-value changes of these derivatives are recognized in the hedging reserve in equity until recognition of the related cash flows. Net-investment hedge accounting is applied for the cross currency swaps used to protect net-investments in foreign entities; the fair value changes of these derivatives are recognized in the translation reserve in equity until the net-investment is disposed of, to the extent that the changes in fair value are caused by changes in currency exchange rates.

Financial instruments that are subject to changes in stock exchange prices or indexes are subject to a price risk. At year-end 2007 DSM was not exposed to any material price risk in relation to investments in available-for-sale securities.

DSM manages the credit risk to which it is exposed by applying credit limits per financial institution and by dealing exclusively with financial institutions having a high credit rating. At the balance sheet date there were no significant concentrations of credit risk.

With regard to treasury activities it is ensured that financial transactions are only concluded with counterparties that have at least a Moody's credit rating of P1 for short-term instruments and A3 for long-term instruments. At business group level, outstanding receivables are continuously monitored by the management of the operating companies. Appropriate allowances are made for credit risks that have been identified (as listed in note 16). It is therefore unlikely that significant losses will arise in relation to receivables that have not been provided for.

The maximum exposure to credit risk is represented by the carrying amounts of financial assets that are recognized in the balance sheet, including derivative financial instruments with a positive market value. No significant agreements or financial instruments were available at the reporting date that would reduce the maximum exposure to credit risk.

In the following table the carrying amounts and the estimated fair values of financial instruments are disclosed:

The following methods and assumptions were used to determine the fair value of financial instruments: cash, current investments, current receivables, current borrowings and other current and non-current liabilities are stated at carrying amount, which approximates fair value in view of the short maturity of these instruments. The fair values of financial derivatives and long-term instruments are based on calculations, quoted market prices or quotes obtained from intermediaries.

The following table shows the carrying amounts of the financial derivatives recognized, broken down by type and purpose: