Ford 2008 Annual Report Download - page 62

Quantitative and Qualitative Disclosures About Market Risk
60 Ford Motor Company | 2008 Annual Report
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 model to assess our potential exposure, defined at a
95% confidence level. Our exposures are monitored on a regular basis and included in periodic reporting to our
Treasurer.
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 RISK
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:
xMarket risk — the possibility that changes in interest and currency exchange rates will adversely affect cash flow
and economic value;
xCredit risk — the possibility of loss from a customer’s failure to make payments according to contract terms;
xResidual risk — the possibility that the actual proceeds received at lease termination will be lower than projections
or return volumes will be higher than projections; and
xLiquidity risk — the possibility that Ford Credit may be unable to meet all of its 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 services 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 (foreign currency risk and interest rate risk) is included below.
Foreign Currency Risk. Ford Credit's policy is to minimize exposure to changes in currency exchange rates. To meet
funding objectives, Ford Credit borrows in a variety of currencies, principally U.S. dollars and Euros. Ford Credit faces
exposure to currency exchange rates if a mismatch exists between the currency of 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 may execute the following foreign
currency derivatives to convert substantially all of foreign currency debt obligations to the local country currency of the
receivables:
xForeign currency swap — an agreement to convert non-U.S. dollar long-term debt to U.S. dollar-denominated
payments or non-local market debt to local market debt for our international affiliates; or
xForeign currency forward — an agreement to buy or sell an amount of funds in an agreed currency at a certain
time in the future for a certain price.
As a result of this policy, Ford Credit believes its market risk exposure relating to changes in currency exchange rates
is insignificant.