Ford 2011 Annual Report Download - page 83

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Quantitative and Qualitative Disclosures About Market Risk
Ford Motor Company | 2011 Annual Report 81
Substantially all of our counterparty exposures are with counterparties that have an investment grade rating.
Investment grade is our guideline for counterparty minimum long-term ratings.
For additional information about derivative notional amount and fair value of derivatives, please refer to Note 25 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:
• Market risk - the possibility that changes in interest and currency exchange rates will adversely affect cash flow
and economic value;
Credit risk - the possibility of loss from a customer's failure to make payments according to contract terms;
Residual 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
Liquidity 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, as well as liquidity risk, are discussed above in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." A discussion of Ford Credit's market risks (interest rate risk and foreign currency risk) is included
below.
Interest Rate Risk. Ford Credit is exposed to interest rate risk to the extent that its assets and the related debt have
different re-pricing periods, and consequently, respond differently to changes in interest rates.
Ford Credit's assets consist primarily of fixed-rate retail installment sale and lease contracts and floating-rate
wholesale receivables. Fixed-rate retail installment sale and lease contracts are originated principally with maturities
ranging between two and six years and generally require customers to make equal monthly payments over the life of the
contract. Wholesale receivables are originated to finance new and used vehicles held in dealers' inventory and generally
require dealers to pay a floating rate.
Debt consists primarily of securitizations and short- and long-term unsecured debt. In the case of unsecured term
debt, and in an effort to have funds available throughout business cycles, Ford Credit may borrow at terms longer than the
terms of their assets, in most instances with up to ten year maturities. These debt instruments are principally fixed-rate
and require fixed and equal interest payments over the life of the instrument and a single principal payment at maturity.
Ford Credit's interest rate risk management objective is to reduce volatility in its cash flows and volatility in its
economic value from changes in interest rates based on an established risk tolerance.
Ford Credit uses re-pricing gap analysis and economic value sensitivity analysis to evaluate potential long term
effects of changes in interest rates. It then enters into interest rate swaps, when available, to convert portions of its
floating-rate debt to fixed or its fixed-rate debt to floating to ensure that Ford Credit's exposure falls within the established
tolerances. Ford Credit also uses pre-tax cash flow sensitivity analysis to monitor the level of near-term cash flow
exposure. The pre-tax cash flow sensitivity analysis measures the changes in expected cash flows associated with Ford
Credit's interest-rate-sensitive assets, liabilities, and derivative financial instruments from hypothetical changes in interest
rates over a twelve-month horizon. Ford Credit's Asset-Liability Committee reviews the re-pricing mismatch and exposure
every month and approves interest rate swaps required to maintain exposure within approved thresholds prior to
execution.
To provide a quantitative measure of the sensitivity of its pre-tax cash flow to changes in interest rates, Ford Credit
uses interest rate scenarios that assume a hypothetical, instantaneous increase or decrease of one percentage point in all
interest rates, across all maturities (a "parallel shift"), as well as a base case that assumes that all interest rates remain
constant at existing levels. In reality, interest rate changes are rarely instantaneous or parallel and rates could move more
or less than the one percentage point assumed in Ford Credit's analysis. As a result, the actual impact to pre-tax cash
flow could be higher or lower than the results detailed in the table below. These interest rate scenarios are purely
hypothetical and do not represent Ford Credit's view of future interest rate movements.