Ford 2002 Annual Report Download - page 60

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56
On a monthly basis, Ford Credit determines the sensitivity of the economic value of its portfolio of interest rate-sensitive assets
and liabilities (its economic value) to hypothetical changes in interest rates. Economic value is a measure of the present value
of all future expected cash flows, discounted by market interest rates, and is equal to the present value of interest rate-sensitive
assets minus the present value of interest rate-sensitive liabilities. Ford Credit then enters into interest rate swaps, effectively
converting portions of its floating-rate debt or assets to fixed or its fixed-rate debt or assets to floating, to ensure that the sensi-
tivity of its economic value falls within an established target range. Ford Credit also monitors the sensitivity of its earnings to
interest rates using earnings simulation techniques. These simulations calculate the projected earnings of its portfolio of interest
rate-sensitive assets and liabilities under various interest rate scenarios, including both parallel and non-parallel shifts in the yield
curve. These quantifications of interest rate risk are included in monthly reporting to the GRMC.
The process described above is used to measure and manage the interest rate risk of Ford Credit’s operations in the United
States and Canada, which together represented approximately 74% of its total owned finance receivables at December 31,
2002. For its international affiliates, Ford Credit uses a technique commonly referred to as “gap analysis,” to measure re-pricing
mismatch. This process uses re-pricing schedules, which group assets, debt, and swaps into time-bands based on their
re-pricing period. Under this process, Ford Credit enters into interest rate swaps, effectively changing the re-pricing profile of its
assets and debt, to ensure that any re-pricing mismatch existing in a particular time-band falls within an established tolerance.
As a result of its interest rate risk management process, including derivatives, Ford Credit’s debt re-prices slightly faster than its
assets. Other things equal, this means that during a period of rising interest rates, the interest rates paid on Ford Credit’s debt
will increase more rapidly than the interest rates earned on assets, thereby initially reducing Ford Credit’s earnings by a small
amount. Correspondingly, during a period of falling interest rates, Ford Credit’s earnings would be expected to initially increase
by a small amount. To provide a quantitative measure of the sensitivity of its earnings to changes in interest rates, Ford Credit
uses interest rate scenarios that assume a hypothetical, instantaneous increase or decrease in interest rates of one percentage
point across all maturities, as well as a base case that assumes that interest rates remain constant at existing levels. The
differences between these scenarios and the base case over a one year horizon represent an estimate of the sensitivity of
Ford Credit’s pre-tax earnings over the following year. This sensitivity as of year-end 2001 and 2002 is as follows:
Pre-tax earnings impact given a one Pre-tax earnings impact given a one
percentage point increase in interest rates percentage point decrease in interest rates
(in millions) (in millions)
December 31, 2002 $(153) $156
December 31, 2001 $(120) $121
While the sensitivity analysis presented is Ford Credit’s best estimate of the impacts of specified assumed interest rate
scenarios, actual results could differ from those projected. The model used to conduct this analysis is heavily dependent
on assumptions, particularly those regarding the reinvestment of maturing asset principal, refinancing of maturing debt,
and predicted repayment of sale and lease contracts ahead of contractual maturity.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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