Ford 2011 Annual Report Download - page 84

Quantitative and Qualitative Disclosures About Market Risk
82 Ford Motor Company | 2011 Annual Report
Pre-tax cash flow sensitivity as of year-end 2011 and 2010 was as follows (in millions):
December 31, 2011
December 31, 2010
Pre-Tax Cash Flow Sensitivity (given a
one percentage point instantaneous
increase in interest rates)
$60
$(22)
Pre-Tax Cash Flow Sensitivity (given a
one percentage point instantaneous
decrease in interest rates) (a)
$(60)
$22
_____
(a) Pre-tax cash flow sensitivity given a one percentage point decrease in interest rates requires an assumption of negative interest rates in markets
where existing interest rates are below one percent.
As of December 31, 2011, in the aggregate Ford Credit's assets re-price faster than its debt combined with the
derivative instruments hedging the debt. Other things being equal, this means that during a period of rising interest rates,
the interest rates earned on Ford Credit's assets will increase more rapidly than the interest paid on Ford Credit's debt,
thereby initially increasing Ford Credit's pre-tax cash flow. Correspondingly, during a period of falling interest rates, Ford
Credit would expect its pre-tax cash flow to initially decrease.
While the sensitivity analysis presented is Ford Credit's best estimate of the impacts of the specified assumed interest
rate scenarios, its actual results could differ from those projected. The model Ford Credit uses to conduct this analysis is
heavily dependent on assumptions. Embedded in the model are assumptions regarding the reinvestment of maturing
asset principal, refinancing of maturing debt, replacement of maturing derivatives, exercise of options embedded in debt
and derivatives, and predicted repayment of retail installment sale and lease contracts ahead of contractual maturity.
Ford Credit's repayment projections ahead of contractual maturity are based on historical experience. If interest rates or
other factors change, Ford Credit's actual prepayment experience could be different than projected.
Foreign Currency Risk. Ford Credit's policy is to minimize exposure to changes in currency exchange rates. To meet
funding objectives, Ford Credit borrows in a variety of currencies, principally U.S. dollars, Canadian dollars, Euros and
Pound Sterling. Ford Credit faces exposure to currency exchange rates if a mismatch exists between the currency of
receivables and the currency of the debt funding those receivables. When possible, receivables are funded with debt in
the same currency, minimizing exposure to exchange rate movements. When a different currency is used, Ford Credit
may use foreign currency swaps and foreign currency forwards to convert substantially all of its foreign currency debt
obligations to the local country currency of the receivables:
As a result of this policy, Ford Credit believes its market risk exposure relating to changes in currency exchange rates
is insignificant.
Derivative Fair Values. The net fair value of Ford Credit's derivative financial instruments as of December 31, 2011
was an asset of about $1.1 billion, compared to an asset of $712 million as of December 31, 2010. For additional
information regarding our Financial Services sector derivatives, see Note 25 of the Notes to the Financial Statements.