Ford 2010 Annual Report Download - page 71

Quantitative and Qualitative Disclosures About Market Risk
Ford Motor Company | 2010 Annual Report 69
Our approach to managing counterparty risk is forward-looking and proactive, allowing us to take risk mitigation actions
before risks become losses. Exposure limits are established based on our overall risk tolerance and estimated loss
projections which are calculated from ratings-based historical default probabilities. The exposure limits are lower for lower-
rated counterparties and for longer-dated exposures. Our exposures are monitored on a regular basis and included in
periodic reports 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.
Interest Rate Risk. Ford Credit's primary market risk exposure is interest rate risk, and the particular market to which it
is most exposed is the change in U.S. dollar LIBOR. Interest rate risk exposure results principally from “re-pricing risk” or
differences in the re-pricing characteristics of assets and liabilities. An instrument’s re-pricing period is a term used to
describe how an interest rate-sensitive instrument responds to changes in interest rates. It refers to the time it takes an
instrument’s interest rate to reflect a change in market interest rates. For fixed-rate instruments, the re-pricing period is
equal to the maturity of the instrument’s principal, because the principal is considered to re-price only when re-invested in
a new instrument. For a floating-rate instrument, the re-pricing period is the period of time before the interest rate adjusts
to the market rate. For instance, a floating-rate loan whose interest rate is reset to a market index annually on
December 31 would have a re-pricing period of one year on January 1, regardless of the instrument’s maturity.
Re-pricing risk arises when assets and the related debt have different re-pricing periods, and consequently, respond
differently to changes in interest rates. As an example, consider a hypothetical portfolio of fixed-rate assets that is funded
with floating-rate debt. If interest rates increase, the interest paid on debt increases while the interest received on assets
remains fixed. In this case, the hypothetical portfolio’s cash flows are exposed to changes in interest rates because its
assets and debt have a re-pricing mismatch.
Ford Credit's receivables consist primarily of fixed-rate retail installment sale and lease contracts and floating-rate
wholesale receivables. Fixed-rate retail installment sale and lease contracts are originated principally with maturities
ranging between two and six years and generally require customers to make equal monthly payments over the life of the
contract. Wholesale receivables are originated to finance new and used vehicles held in dealers’ inventory and generally
require dealers to pay a floating rate.