Ally Bank 2014 Annual Report Download - page 74

Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K
62
between assets and the related liabilities used for funding. We enter into various financial instruments, including derivatives, to maintain the
desired level of exposure to the risk of interest rate and other fluctuations. Refer to Note 22 to the Consolidated Financial Statements for
further information.
We are also exposed to some foreign-currency risk arising from foreign-currency denominated assets and liabilities, primarily in Canada.
We enter into hedges to mitigate foreign exchange risk.
We also have exposure to equity price risk, primarily in our Insurance operations, which invests in equity securities that are subject to
price risk influenced by capital market movements. We enter into equity options to economically hedge our exposure to the equity markets.
Additionally, we have exposure to equity price risk related to certain share-based compensation. We enter into prepaid equity forward
contracts to economically hedge a portion of this exposure.
Although the diversity of our activities from our complementary lines of business may partially mitigate market risk, we also actively
manage this risk. We maintain risk management control systems to monitor interest rates, foreign-currency exchange rates, equity price risks,
and any of their related hedge positions. Positions are monitored using a variety of analytical techniques including market value, sensitivity
analysis, and value at risk models.
Fair Value Sensitivity Analysis
The following table and subsequent discussion presents a fair value sensitivity analysis of our assets and liabilities using isolated
hypothetical movements in specific market rates. The analysis assumes adverse instantaneous, parallel shifts in market-exchange rates,
interest rate yield curves, and equity prices. Additionally, since only adverse fair value impacts are included, the natural offset between asset
and liability rate sensitivities that arise within a diversified balance sheet, such as ours, is not considered.
December 31, ($ in millions)2014 2013
Financial instruments exposed to changes in:
Interest rates
Estimated fair value (a) (a)
Effect of 10% adverse change in rates (a) (a)
Foreign-currency exchange rates
Estimated fair value $ 476 $ 588
Effect of 10% adverse change in rates (24) (23)
Equity prices
Estimated fair value $ 902 $ 938
Effect of 10% decrease in prices (95) (90)
(a) Refer to Net Financing Revenue Sensitivity Analysis for information on the interest rate sensitivity of our financial instruments.
Net Financing Revenue Sensitivity Analysis
Interest rate risk represents our most significant exposure to market risk. We actively monitor the level of exposure so that movements in
interest rates do not adversely affect future earnings. We use net financing revenue sensitivity analysis as our primary metric to measure and
manage the interest rate sensitivities of our financial instruments.
We prepare forward-looking forecasts of net financing revenue, which take into consideration anticipated future business growth, asset/
liability positioning, and interest rates based on the implied forward curve. Simulations are used to assess changes in net financing revenue in
multiple interest rates scenarios relative to the baseline forecast. The changes in net financing revenue relative to the baseline are defined as
the sensitivity. Our simulation incorporates contractual cash flows and repricing characteristics for all assets, liabilities and off-balance sheet
exposures and incorporates the effects of changing interest rates on the prepayment and attrition rates of certain assets and liabilities. The
analysis is highly dependent upon a variety of assumptions including the repricing characteristics of deposits with non-contractual maturities.
Our simulation does not assume any specific future actions are taken to mitigate the impacts of changing interest rates.
The net financing revenue sensitivity tests measure the potential change in our pretax net financing revenue over the following twelve
months. A number of alternative rate scenarios are tested, including immediate parallel shocks to the forward yield curve, nonparallel shocks
to the forward yield curve, and stresses to certain term points on the yield curve in isolation to capture and monitor a number of risk types.