Ford 2005 Annual Report Download - page 51

Ford Motor Company Annual Report 2005 48 Ford Motor Company Annual Report 2005 49
Quantitative and Qualitative Disclosures About Market Risk
OVERVIEW
We are exposed to a variety of market and other risks, including the effects of changes in foreign currency exchange rates,
commodity prices, interest rates, as well as risks to availability of funding sources, hazard events, and specific asset risks.
These risks affect our Automotive and Financial Services sectors differently. We monitor and manage these exposures as an
integral part of our overall risk management program, which includes regular reports to a central management committee, the Global
Risk Management Committee ("GRMC"). The GRMC is chaired by our Chief Financial Officer, and its members include our
Treasurer, our Controller, and other members of senior management.
Our Automotive and Financial Services sectors are exposed to liquidity risk, or the possibility of having to curtail their businesses
or being unable to meet present and future financial obligations as they come due because funding sources may be reduced or become
unavailable. We, and particularly Ford Credit, which comprises substantially all of our Financial Services sector, maintain plans for
sources of funding to ensure liquidity through a variety of economic or business cycles. As discussed in greater detail in
"Managementʼs Discussion and Analysis of Financial Condition and Results of Operations," our funding sources include sales of
receivables in securitizations and other structured financings, unsecured debt issuances and bank borrowings.
We are exposed to a variety of insurable risks, such as loss or damage to property, liability claims, and employee injury. We
protect against these risks through a combination of self-insurance and the purchase of commercial insurance designed to protect
against events that could generate significant losses.
Direct responsibility for the execution of our market risk management strategies resides with our Treasurerʼs Office and is
governed by written polices and procedures. Separation of duties is maintained between the development and authorization of
derivative trades, the transaction of derivatives, and the settlement of cash flows. Regular audits are conducted to ensure that
appropriate controls are in place and that they remain effective. In addition, our market risk exposures and our use of derivatives to
manage these exposures are reviewed by the GRMC, and the Audit and Finance Committees of our Board of Directors.
In accordance with corporate risk management policies, we use derivative instruments, such as forward contracts, swaps and
options that economically hedge certain exposures (foreign currency, commodity, and interest rates). Derivative positions are used to
manage underlying exposures; we do not use derivative contracts for speculative purposes. In certain instances, we forgo hedge
accounting, which results in unrealized gains and losses that are recognized currently in net income; examples of economic hedges
that do not qualify for hedge accounting include foreign currency hedges of inter-company loans and dividends and certain
transactions that use multiple hedge instruments. For additional information on our derivatives, see Note 20 of the Notes to the
Financial Statements.
The market and counterparty risks of our Automotive sector and Ford Credit are discussed and quantified below.
AUTOMOTIVE MARKET AND COUNTERPARTY RISK
Our Automotive sector frequently has expenditures and receipts denominated in foreign currencies, including the following:
purchases and sales of finished vehicles and production parts, debt and other payables, subsidiary dividends, and investments in
foreign operations. These expenditures and receipts create exposures to changes in exchange rates. We also are exposed to changes in
prices of commodities used in our Automotive sector and changes in interest rates.
Beginning with this report, we have changed our risk disclosure methodology for foreign currency risk and commodity risk to
sensitivity analysis, which we believe is a more commonly used and more easily understood disclosure alternative.
Foreign currency risk and commodity risk are measured and quantified using a model to evaluate the sensitivity of the fair value of
currency and commodity derivative instruments with exposure to market risk that assumes instantaneous, parallel shifts in rates and/or
prices. For options and instruments with non-linear returns, appropriate models are utilized to determine the impact of shifts in rates
and prices.
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. Accordingly, we use derivative instruments to hedge our economic exposure
with respect to forecasted revenues and costs, 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).