Ford 2003 Annual Report Download - page 65

2003 ANNUAL REPORT 63
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
Foreign currency risk is the possibility that our financial results could be better or worse than planned because of changes in
foreign currency exchange rates. We use derivative instruments to hedge our economic exposure with respect to assets, liabilities,
investments in foreign operations, and firm commitments denominated in foreign currencies. In our hedging actions, we use
primarily instruments commonly used by corporations to reduce foreign exchange risk (e.g., forward contracts and options).
At December 31, 2003, the EaR from foreign currency exchange movements over the next twelve months is projected at less
than $350 million, within a 95% confidence level for the unhedged exposure. When calculated at the end of each quarter
throughout the year, the high was $550 million, the low was $350 million and the average was $460 million; the risks impacting
financial instruments are offset with underlying exposure being hedged. The 2003 year-end projection is approximately $40 million
lower than the EaR projection for 2003 calculated as of December 31, 2002. The decreased exposure results primarily from more
diversification benefit due to lower correlation among major currency pairings. The effect of currency movements on business
units will vary based on the currency profile of the business unit (including any hedging actions taken). It can also be affected
by competitive responses to currency changes.
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
metals (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 commodities exposures at December 31, 2003, the EaR from commodity price movements over the next
twelve months is projected at less than $90 million, within a 95% confidence level (when calculated at the end of each quarter
throughout the year, the high was $90 million, the low was $69 million and the average was $80 million); the risks impacting
financial instruments are offset with underlying exposure being hedged. The year-end level is approximately $31 million higher
than the EaR projection for 2003 calculated as of December 31, 2002. The drivers of this increase are higher commodity price
levels, price volatilities and exposures.
Where derivative instruments do not exist or do not provide a highly correlated hedge, our purchasing organization negotiates
contracts mitigating price risk (e.g., steel and resins) which are approved by the GRMC.
INTEREST RATE RISK
Interest rate risk relates to the gain or loss we could incur in our Automotive investment portfolio in the event of a change in
interest rates. Our interest rate sensitivity analysis on the investment portfolio includes cash and cash equivalents, marketable
and loaned securities and short-term VEBA assets. At December 31, 2003, we had $25.9 billion in cash, compared to
$25.3 billion at December 31, 2002. We invest our cash in securities of various types and maturities, the value of which are
subject to fluctuations in interest rates. 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, 2003, the value of our Trading portfolio was $24.2 billion (including assets contained in a
short-term VEBA trust), which is $0.6 billion higher than December 31, 2002. The value of our Available for Sale portfolio was
$1.7 billion, which is unchanged from December 31, 2002.
Assuming a hypothetical, instantaneous increase in interest rates of one percentage point, the value of our Trading and Available
for Sale portfolios would be reduced by $206 million and $29 million, respectively. This compares to $225 million and $29 million,
respectively, as calculated as of December 31, 2002. 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.
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