Ford 2002 Annual Report Download - page 57

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 responsible for developing our overall risk management
objectives and reviewing performance against these objectives. The GRMC is chaired by our Chief Financial Officer, and its
members include our Treasurer, our Controller, and the Chief Financial Officer of Ford Credit.
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.
Our funding sources include commercial paper, term debt, sale of receivables through securitization transactions, committed
lines of credit from major banks, and other sources.
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 Treasurer’s 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 Committee of our Board of Directors. For additional
information on our derivatives, see Note 17 of our Notes to Financial Statements.
The market and counterparty risks of our Automotive sector and Ford Credit are discussed and quantified below. The
quantitative disclosures presented are independent of any adjustments related to SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities.
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 calculate the changes in the value of
currency and commodity derivative instruments along with the underlying exposure being hedged. Beginning with this report,
we have changed our risk disclosure methodology to an earnings at risk (“EaR”) model from a value at risk (“VaR”). VaR is a
valuation of the existing hedge portfolio and projects the potential change in the portfolio’s liquidation value. EaR provides
the potential impact to pre-tax earnings related to foreign currency and commodity price exposure and is a more meaningful
metric to an ongoing business than VaR. The model to calculate EaR combines current market data with historical data on
volatilities and correlations of the underlying currencies and commodity prices. EaR includes hedging derivatives as well as
the underlying exposures over a twelve month period.
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. We use derivative instruments to hedge 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).
Our EaR is based on transaction exposure, which is the foreign currency exposure that results from cross border cash flows
from specific transactions, and our related hedging activity. At December 31, 2002, the EaR from foreign currency exchange
movements over the next twelve months is less than $390 million, within a 95% confidence level, which is approximately $60
million higher than the EaR projection for 2002 calculated as of December 31, 2001. The increased exposure results primarily
from less diversification benefit due to higher correlation among major currency pairings.