Ford 2009 Annual Report Download - page 72

Quantitative and Qualitative Disclosures About Market Risk
70 Ford Motor Company | 2009 Annual Report
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.
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 currency exchange rates. Accordingly, our normal practice is to use derivative
instruments, when available, 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 and
option contracts).
The net fair value of foreign exchange forward and option contracts (including adjustments for credit risk) as of
December 31, 2009 was a liability of $26 million compared to a net fair value asset of $249 million as of
December 31, 2008. The potential decrease in fair value of foreign exchange forward and option contracts (excluding
adjustments for credit risk), assuming a 10% adverse change in the underlying foreign currency exchange rates versus
the U.S. dollar, would be approximately $622 million at December 31, 2009 and was $600 million as of
December 31, 2008. If adjustments for credit risk were to be included, the decrease would be smaller.
At December 31, 2009, substantially all of our intercompany loans were fully hedged.
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 two of our largest commodity
exposures and are among the most difficult to hedge.
Our normal practice is to use derivative instruments, when available, 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 (including adjustments for credit risk) as of
December 31, 2009 was a liability of $39 million, compared to a liability of $212 million as of December 31, 2008. The
potential decrease in fair value of commodity forward and option contracts (excluding adjustments for credit risk),
assuming a 10% decrease in the underlying commodity prices, would be approximately $20 million at
December 31, 2009, compared with a decrease of $26 million at December 31, 2008. If adjustments for credit risk were
to be included, the decrease would be smaller.
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.