Ford 2002 Annual Report Download - page 58

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54
COMMODITY PRICE RISK
Commodity price risk is the possibility of higher or lower costs due to changes in the prices of commodities, such as non-ferrous
(e.g., aluminum) and precious metals (e.g., palladium, platinum and rhodium), ferrous alloys (e.g., steel), energy (e.g., natural gas
and electricity), and plastics/resins (e.g., polypropylene), which we use in the production of motor vehicles. We use derivative
instruments to hedge the price risk associated with the purchase of those commodities that we can economically hedge. In our
hedging actions, we primarily use instruments commonly used by corporations to reduce commodity price risk (e.g., financially
settled forward contracts, swaps, and options).
Based on our financial hedging activities with derivatives and the associated underlying exposures (e.g., precious metals,
aluminum, copper, natural gas, and unleaded gas), at December 31, 2002, the EaR from commodity price movements over the
next twelve months is less than $59 million, within a 95% confidence level, which is approximately $25 million lower than the
EaR projection for 2002 calculated as of December 31, 2001. The decreased exposure results primarily from declining
consumption exposures and a lower cost basis.
In addition to these price-hedging activities, our procurement activities ensure that we have adequate supplies of raw
materials used in our business. These procurement activities utilize forward purchase contracts, long-term supply contracts,
and stockpiles. Any price-hedging inherent in our procurement activities is approved by the GRMC.
INTEREST RATE RISK
Interest rate risk relates to the gain or loss we could incur to our investment portfolio in the event of a change in interest rates.
We have $25.3 billion in cash (including assets contained in a VEBA trust), which we invest in securities of various types and
maturities. Many of these securities are interest sensitive. These securities are generally classified as Trading or Available for
Sale. The Trading portfolio gains and losses (unrealized and realized) are reported in the income statement. The Available for
Sale portfolio realized gains or losses are reported in the income statement, and unrealized gains and losses are reported in
the Consolidated Statement of Stockholders’ Equity in other comprehensive income. The investment strategy is based on
clearly defined risk and liquidity guidelines to maintain liquidity, minimize risk, and earn a reasonable return on the
short-term investment.
At any time, a rise in interest rates could have a material adverse impact on the fair value of our Trading and our Available for
Sale portfolios. As of December 31, 2002, the value of our Trading portfolio was $18.5 billion (including assets contained in a
VEBA trust), the value of our Available for Sale portfolio was $1.6 billion, and the value of our cash and cash equivalents was
$5.2 billion.
Assuming a hypothetical, instantaneous increase in interest rates of one percentage point, the value of our Available for Sale and
Trading portfolios would be reduced by $185 million and $27 million, respectively. While this is our best estimate of the impact of
the specified interest rate scenario, actual results could differ from those projected. The sensitivity analysis presented assumes
interest rate changes are instantaneous, parallel shifts in the yield curve. In reality, interest rate changes are rarely instantaneous
or parallel.
COUNTERPARTY RISK
Counterparty risk relates to the loss we could incur if an obligor or counterparty defaulted on an investment or a derivative
contract. Exposures primarily relate to investments in fixed-income instruments and derivative contracts used for managing
interest rate, currency and commodity risk. We, together with Ford Credit, establish exposure limits for each counterparty to
minimize risk and provide counterparty diversification. Our exposures are monitored on a regular basis and are included in
monthly reporting to the GRMC.
Our approach to managing counterparty risk is forward-looking and proactive, allowing us to take risk mitigation actions.
We establish exposure limits for both mark-to-market and future potential exposure, based on our overall risk tolerance and
ratings-based historical default probabilities. The exposure limits are lower for lower-rated counterparties and for longer-dated
exposures. We use a Monte Carlo simulation technique to assess our potential exposure by tenor, defined at a 95%
confidence level.
Substantially all of our counterparty and obligor exposures are with counterparties and obligors that are rated single-A or better.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK