Ford 2009 Annual Report Download - page 73

Quantitative and Qualitative Disclosures About Market Risk
Ford Motor Company | 2009 Annual Report 71
Interest Rate Risk. Interest rate risk relates to the gain or loss we could incur in our Automotive investment portfolios
due to a change in interest rates. Our interest rate sensitivity analysis on the investment portfolios includes cash and
cash equivalents and net marketable securities. At December 31, 2009, we had $25.5 billion in our Automotive
investment portfolios, compared to $13.4 billion at December 31, 2008. We invest the portfolios in securities of various
types and maturities, the value of which are subject to fluctuations in interest rates. The portfolios are classified as trading
portfolios and gains and losses (unrealized and realized) are reported in the statement of operations. The investment
strategy is based on clearly defined risk and liquidity guidelines to maintain liquidity, minimize risk, and earn a reasonable
return on the short-term investment. In 2009, safety of principal was the primary objective in investing our Automotive
cash.
At any time, a rise in interest rates could have a material adverse impact on the fair value of our portfolios. Assuming
a hypothetical increase in interest rates of one percentage point, the value of our portfolios would be reduced by about
$62 million. This compares to $57 million, as calculated as of December 31, 2008. While these are our best estimates of
the impact of the specified interest rate scenario, actual results could differ from those projected. The sensitivity analysis
presented assumes interest rate changes are instantaneous, parallel shifts in the yield curve. In reality, interest rate
changes of this magnitude are rarely instantaneous or parallel.
Counterparty Risk. Counterparty risk relates to the loss we could incur if an obligor or counterparty defaulted on an
investment or a derivative contract. We enter into master agreements with counterparties that allow netting of certain
exposures in order to manage this risk. Exposures primarily relate to investments in fixed income instruments and
derivative contracts used for managing interest rate, foreign currency exchange rate and commodity price risk. We,
together with Ford Credit, establish exposure limits for each counterparty to minimize risk and provide counterparty
diversification.
Our approach to managing counterparty risk is forward-looking and proactive, allowing us to take risk mitigation actions
before risks become losses. We establish exposure limits for both net fair value and future potential exposure, based on
our overall risk tolerance and ratings-based historical default probabilities. The exposure limits are lower for lower-rated
counterparties and for longer-dated exposures. We use a model to assess our potential exposure, defined at a
95% confidence level. Our exposures are monitored on a regular basis and included in periodic reporting to our Treasurer.
Substantially all of our counterparty exposures are with counterparties that are rated single-A or better. Our guideline
for counterparty minimum long-term ratings is BBB-.
For additional information about derivative notional amount and fair value of derivatives, please refer to Note 26 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.