Ford 2010 Annual Report Download - page 70

Quantitative and Qualitative Disclosures About Market Risk
68 Ford Motor Company | 2010 Annual Report
actions, we use primarily instruments commonly used by corporations to reduce foreign exchange risk (e.g., forward and
option contracts).
The net fair value of foreign exchange forward and option contracts (including adjustments for credit risk) as of
December 31, 2010 was a liability of $35 million compared to a liability of $26 million as of December 31, 2009. The
potential decrease in fair value of foreign exchange forward and option contracts (excluding adjustments for credit risk),
assuming a 10% adverse change in the underlying foreign currency exchange rates versus the U.S. dollar, would be
approximately $334 million at December 31, 2010, compared with a decrease of $622 million as of December 31, 2009. If
adjustments for credit risk were to be included, the decrease would be smaller.
Commodity Price Risk. Commodity price risk is the possibility that our financial results could be better or worse than
planned because of changes in the prices of commodities used in the production of motor vehicles, such as non-ferrous
metals (e.g., aluminum), precious metals (e.g., palladium), ferrous metals (e.g., steel and iron castings), energy (e.g.,
natural gas and electricity), and plastics/resins (e.g., polypropylene). Steel and resins are two of our largest commodity
exposures and are among the most difficult to hedge.
Our normal practice is to use derivative instruments, when available, to hedge the price risk associated with the
purchase of those commodities that we can economically hedge (primarily non-ferrous metals and precious metals). In
our hedging actions, we primarily use instruments commonly used by corporations to reduce commodity price risk (e.g.,
financially settled forward contracts, swaps, and options).
The net fair value of commodity forward and option contracts (including adjustments for credit risk) as of
December 31, 2010 was an asset of $63 million, compared to a liability of $39 million as of December 31, 2009. The
potential decrease in fair value of commodity forward and option contracts (excluding adjustments for credit risk),
assuming a 10% decrease in the underlying commodity prices, would be approximately $60 million at
December 31, 2010, compared with a decrease of $20 million at December 31, 2009. If adjustments for credit risk were
to be included, the decrease would be smaller.
In addition, our purchasing organization (with guidance from the GRMC as appropriate) negotiates contracts to ensure
continuous supply of raw materials. In some cases, these contracts stipulate minimum purchase amounts and specific
prices, and as such, play a role in managing price risk.
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, 2010, we had $20.5 billion in our Automotive
investment portfolios, compared to $24.9 billion at December 31, 2009. 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 2010, 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
$81 million. This compares to $62 million, as calculated as of December 31, 2009. 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.