Ford 2007 Annual Report Download - page 52

50 Ford Motor Company | 2007 Annual Report
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).
The net fair value of foreign exchange forward and option contracts as of December 31, 2007 was an asset of
$632 million compared to an asset of $705 million as of December 31, 2006. The potential decrease in fair value of
foreign exchange forward and option contracts, assuming a 10% adverse change in the underlying foreign currency
exchange rates, would be about $2.0 billion and $2.1 billion at December 31, 2007 and 2006, respectively.
Commodity Price Risk. Commodity price risk is the possibility that our financial results could be better or worse than
planned because of changes in the prices of commodities used in the production of motor vehicles, such as non-ferrous
metals (e.g., aluminum), precious metals (e.g., palladium), ferrous metals (e.g., steel and iron castings), energy (e.g.,
natural gas and electricity), and plastics/resins (e.g., polypropylene). Steel and resins are our two largest commodity
exposures and are among the most difficult to hedge.
We use derivative instruments to hedge the price risk associated with the purchase of those commodities that we can
economically hedge (primarily non-ferrous metals, precious metals and energies). 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).
The net fair value of commodity forward and option contracts as of December 31, 2007 was an asset of $353 million
compared to an asset of $750 million as of December 31, 2006. The potential decrease in fair value of commodity
forward and option contracts, assuming a 10% adverse change in the underlying commodity price, would be about
$100 million and $200 million at December 31, 2007 and 2006, respectively.
In addition, our purchasing organization (with guidance from the GRMC as appropriate) negotiates contracts to ensure
continuous supply of raw materials. In some cases, these contracts stipulate minimum purchase amounts and specific
prices, and as such, play a role in managing price risk.
Interest Rate Risk. Interest rate risk relates to the gain or loss we could incur in our Automotive investment portfolio
due to a change in interest rates. Our interest rate sensitivity analysis on the investment portfolio includes cash and cash
equivalents, net marketable and loaned securities. At December 31, 2007, we had $33 billion in our Automotive
investment portfolio, compared to $32.6 billion at December 31, 2006. We invest the portfolio in securities of various
types and maturities, the value of which are subject to fluctuations in interest rates. These securities are generally
classified as either 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
Accumulated other comprehensive income/(loss). 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 available-
for-sale portfolios. As of December 31, 2007, the value of our trading portfolio (including cash and cash equivalents) was
$31.2 billion, which is $300 million higher than December 31, 2006. The value of our available-for-sale portfolio (including
cash equivalents) was about $1.6 billion, which is about $50 million lower than December 31, 2006.
Assuming a hypothetical increase in interest rates of one percentage point, the value of our trading and available-for-
sale portfolios would be reduced by about $61 million and $24 million, respectively. This compares to $92 million and
$23 million, respectively, as calculated as of December 31, 2006. While these are our best estimates 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 of this
magnitude are rarely instantaneous or parallel.
Quantitative and Qualitative Disclosures About Market Risk