Ford 2003 Annual Report Download - page 66

64 FORD MOTOR COMPANY
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 its 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 rates and commodity price risk. We, together with Ford Credit, establish exposure limits for each
counterparty to minimize risk and provide counterparty diversification. Our exposures are monitored on a regular basis and
are included in monthly reporting to the GRMC.
Our approach to managing counterparty risk is forward-looking and proactive, allowing us to take risk mitigation actions. We
establish exposure limits for both mark-to-market 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 Monte Carlo simulation technique to assess our potential exposure by tenor, defined at a 95% confidence level.
Substantially all of our counterparty and obligor exposures are with counterparties and obligors that are rated single-A or better.
FORD CREDIT MARKET RISK
OVERVIEW
Ford Credit is exposed to 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 future market interest and currency exchange rates or prices will have
an adverse impact on operating results.
•Credit risk — the possibility of loss from a customers’ failure to make payments according to contract terms.
•Residual risk — the possibility that the actual proceed received by Ford Credit upon sales of returned lease vehicles
at lease termination will be lower than the depreciated values (i.e., residual values) of those vehicles.
•Liquidity risk — the possibility of being unable to meet all 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 products are priced consistent with these risks. Credit and residual risks are discussed
above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Critical
Accounting Estimates” and liquidity risk is discussed above in “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” under the caption “Liquidity and Capital Resources — Financial Services Sector —Ford Credit.”
The following discusses Ford Credit’s market risks:
Foreign Currency Risk — To meet funding objectives, Ford Credit issues debt or, for its international affiliates, draws on local
credit lines in a variety of currencies. Ford Credit faces exposure to currency exchange rates if a mismatch exists between the
currency of its receivables and the currency of the debt funding those receivables. When possible, receivables are funded with
debt in the same currency, minimizing exposure to exchange rate movements. When a different currency is used, Ford Credit
seeks to minimize the impact of currency exchange rates on operating results by executing foreign currency derivatives. These
derivatives convert substantially all of its foreign currency debt obligations to the local country currency of the receivables. As a
result, Ford Credit's market risk exposure relating to currency exchange rates is believed to be immaterial.
Interest Rate Risk — Interest rate risk is the primary market risk to which Ford Credit is exposed and consists principally of
“re-pricing risk” or differences in the re-pricing characteristics of assets and liabilities. An instrument’s re-pricing period is a term
used by financial institutions 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 for repayment of the instrument’s principal because, with a fixed interest rate, 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 31st would have a re-pricing period of one year on January 1st, regardless of the
instrument’s maturity.
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. Ford Credit’s
funding sources consist primarily of short– and long–term unsecured debt and sales of receivables in securitizations. In the case
of unsecured term debt, and in an effort to have funds available throughout the business cycles, Ford Credit may borrow at
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