Ford 2006 Annual Report Download - page 47

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45
Counterparty Risk. The use of derivatives to manage market risk results in counterparty risk, which is the loss we
could incur if counterparty defaulted on a derivative contract. We enter into master agreements with counterparties that
allow netting of certain exposures in order to manage this risk. Exposures primarily relate to derivative contracts used for
managing interest rate, foreign currency exchange rate and commodity price risk. We, together with Ford Credit,
establish exposure limits for each counterparty to minimize risk and provide counterparty diversification.
Our approach to managing counterparty risk is forward-looking and proactive, allowing us to take risk mitigation
actions before risks become losses. We establish exposure limits for both net fair value 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. We monitor and report our exposures to the Treasurer on
a periodic basis.
Substantially all of our counterparty exposures are with counterparties that are rated single-A or better. Our guideline
for counterparty minimum long-term ratings is BBB-.
For additional information about derivative notional amount and fair value of derivatives, please refer to Note 22 of the
Notes to the Financial Statements.
FORD CREDIT MARKET RISKS
Overview. Ford Credit is exposed to a variety of risks in the normal course of its business activities. In addition to
counterparty risk discussed above, Ford Credit is subject to the following additional types of risks that it seeks to identify,
assess, monitor and manage, in accordance with defined policies and procedures:
•Market risk. The possibility that changes in interest and currency exchange rates will adversely affect Ford Credit's
cash flow and economic value;
•Credit risk. The possibility of loss from a customer's failure to make payments according to contract terms;
•Residual risk. The possibility that the actual proceeds Ford Credit receives at lease termination will be lower than
its projections or return rates will be higher than its projections; and,
•Liquidity risk. The possibility that Ford Credit may be unable to meet all current and future obligations in a timely
manner.
Each form of risk is uniquely managed in the context of its contribution to Ford Credit's overall global risk. Business
decisions are evaluated on a risk-adjusted basis and products are priced consistent with these risks. Credit and residual
risks are discussed above in "Management's Discussion and Analysis of Financial Condition and Results of Operations –
Critical Accounting Estimates" and liquidity risk is discussed above in "Management's Discussion and Analysis of
Financial Condition and Results of Operations – Liquidity and Capital Resources". A discussion of Ford Credit's market
risks is included below.
Foreign Currency Risk. To meet funding objectives, Ford Credit issues debt or, for its international affiliates, draws on
local credit lines in a variety of currencies. Ford Credit faces exposure to currency exchange rate changes if a mismatch
exists between the currency of its receivables and the currency of the debt funding those receivables. When possible,
receivables are funded with debt in the same currency, minimizing exposure to exchange rate movements. When a
different currency is used, Ford Credit seeks to minimize its exposure to changes in currency exchange rates by executing
foreign currency derivatives. These derivatives convert substantially all of its foreign currency debt obligations to the local
country currency of the receivables. As a result, Ford Credit's market risk exposure relating to currency exchange rates is
believed to be immaterial.
Quantitative and Qualitative Disclosures About Market Risk