DELPHI 2013 Annual Report Download - page 81

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from changes in currency exchange rates and certain commodity prices. In order to
manage these risks, we operate a centralized risk management program that consists of entering into a variety of derivative
contracts with the intent of mitigating our risk to fluctuations in currency exchange rates and commodity prices. We do not
enter into derivative transactions for speculative or trading purposes.
A discussion of our accounting policies for derivative instruments is included in Note 2. Significant Accounting Policies
to the audited consolidated financial statements included herein and further disclosure is provided in Note 17. Derivatives and
Hedging Activities to the audited consolidated financial statements included herein. We maintain risk management control
systems to monitor exchange and commodity risks and related hedge positions. Positions are monitored using a variety of
analytical techniques including market value and sensitivity analysis. The following analyses are based on sensitivity tests,
which assume instantaneous, parallel shifts in currency exchange rates and commodity prices. For options and instruments with
non-linear returns, appropriate models are utilized to determine the impact of shifts in rates and prices. Currently, we do not
have any options or instruments with non-linear returns.
We have currency exposures related to buying, selling and financing in currencies other than the local currencies in which
we operate. Historically, we have reduced our exposure through financial instruments (hedges) that provide offsets or limits to
our exposures, which are opposite to the underlying transactions. We also face an inherent business risk of exposure to
commodity prices risks, and have historically offset our exposure, particularly to changes in the price of various non-ferrous
metals used in our manufacturing operations, through fixed price purchase agreements, commodity swaps and option contracts.
We continue to manage our exposures to changes in currency rates and commodity prices using these derivative instruments.
Currency Exchange Rate Risk
Currency exposures may impact future earnings and/or operating cash flows. In some instances, we choose to reduce our
exposures through financial instruments (hedges) that provide offsets or limits to our exposures. Currently our most significant
currency exposures relate to the Mexican Peso, Chinese Yuan (Renminbi), Polish Zloty, Turkish Lira and Brazilian Real. As of
December 31, 2013 the net fair value asset of all financial instruments, including hedges and underlying transactions, with
exposure to currency risk was approximately $859 million and the net fair value asset at December 31, 2012 was $839 million.
The potential loss or gain in fair value for such financial instruments from a hypothetical 10% adverse or favorable change in
quoted currency exchange rates would be approximately $205 million and $168 million at December 31, 2013 and 2012,
respectively. The impact of a 10% change in rates on fair value differs from a 10% change in the net fair value asset due to the
existence of hedges. The model assumes a parallel shift in currency exchange rates; however, currency exchange rates rarely
move in the same direction. The assumption that currency exchange rates change in a parallel fashion may overstate the impact
of changing currency exchange rates on assets and liabilities denominated in currencies other than the U.S. dollar.
Commodity Price Risk
Commodity swaps/average rate forward contracts are executed to offset a portion of our exposure to the potential change
in prices mainly for various non-ferrous metals used in the manufacturing of automotive components. The net fair value of our
contracts was a liability of approximately $8 million and approximately $5 million at December 31, 2013 and 2012,
respectively. If the price of the commodities that are being hedged by our commodity swaps/average rate forward contracts
changed adversely or favorably by 10%, the fair value of our commodity swaps/average rate forward contracts would decrease
or increase by $33 million and $26 million at December 31, 2013 and 2012, respectively. A 10% change in the net fair value
liability differs from a 10% change in rates on fair value due to the relative differences between the underlying commodity
prices and the prices in place in our commodity swaps/average rate forward contracts. These amounts exclude the offsetting
impact of the price risk inherent in the physical purchase of the underlying commodities.
Interest Rate Risk
Our exposure to market risk associated with changes in interest rates relates primarily to our debt obligations. As of
December 31, 2013, we had approximately $564 million of floating rate debt principally related to the Credit Agreement. The
Credit Agreement carries an interest rate, at our option, of either (a) the ABR plus 0.25% per annum, or (b) LIBOR plus
1.25% per annum.
The interest rate period with respect to the LIBOR interest rate option can be set at one-, two-, three-, or six-months as
selected by us in accordance with the terms of the Credit Agreement (or other period as may be agreed by the applicable
lenders), but payable no less than quarterly. We may elect to change the selected interest rate over the term of the Credit
Facilities in accordance with the provisions of the Credit Agreement. The applicable interest rates listed above for the
Revolving Credit Facility and the Tranche A Term Loan may increase or decrease from time to time in increments of 0.25% to
0.50%, up to a maximum of 1.0% based on changes to our corporate credit ratings. Accordingly, the interest rate will fluctuate