Ford 2007 Annual Report Download - page 55

Ford Motor Company | 2007 Annual Report 53
As a result of its interest rate risk management process, Ford Credit's debt, combined with the derivative instruments
economically hedging its debt, re-prices 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 its assets, thereby initially reducing Ford Credit's pre-tax cash flow. Correspondingly, during a period of falling interest
rates, Ford Credit's pre-tax cash flow would be expected to initially increase. To provide a quantitative measure of the
sensitivity of its pre-tax cash flow 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 (a "parallel
shift"), 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 twelve-month period represent an estimate of the sensitivity of Ford
Credit's pre-tax cash flow. The sensitivity as of year-end 2007 and 2006 was as follows (in millions):
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Based on assumptions included in the analysis, sensitivity to a one percentage point instantaneous change in interest
rates was lower at year-end 2007 than at year-end 2006. This change primarily reflects the results of normal fluctuations
within the approved tolerances of risk management strategy. While the sensitivity analysis presented is Ford Credit's best
estimate of the impacts of specified assumed interest rate scenarios, the model Ford Credit uses for this analysis is
heavily dependent on assumptions, so that actual results could differ from those projected. Embedded in the model Ford
Credit uses are assumptions regarding the reinvestment of maturing asset principal, refinancing of maturing debt,
replacement of maturing derivatives, exercise of options embedded in debt and derivatives, and predicted repayment of
retail installment sale and lease contracts ahead of contractual maturity. Ford Credit's repayment projections of retail
installment sale and lease contracts ahead of contractual maturity are based on historical experience. If interest rates or
other factors were to change, the actual prepayment experience could be different than projected.
Additionally, interest rate changes of one percentage point or more are rarely instantaneous or parallel, and rates
could move more or less than the one percentage point assumed in Ford Credit's analysis. As a result, the actual impact
to pre-tax cash flow could be higher or lower than the results detailed above. The model used to conduct this analysis
also relies heavily on assumptions regarding the reinvestment of maturing asset principal, refinancing of maturing debt,
and predicted repayment of sale and lease contracts ahead of contractual maturity.
The fair value of Ford Credit's net derivative financial instruments (derivative assets less derivative liabilities) as
reported in Note 23 of the Notes to the Financial Statements as of December 31, 2007 was $1.4 billion compared with
$1.5 billion at December 31, 2006. For additional information on Ford Credit derivatives, please refer to the "Financial
Services Sector" discussion in Note 23 of the Notes to the Financial Statements.
Quantitative and Qualitative Disclosures About Market Risk