International Finance: Ford Motor Company - Research Paper Example

A. Introduction Ford Motor Company is one of the major players in the global automobile industry. It is a U.S. based multinational company of Dearborn, Michigan. It has expanded in the six continents of the world that includes, North America, Europe, Asia Pacific, Latin America and Middle East Africa and in the Caribbean regions (Ford Motor Company-website. 2010). The company is operating in all the major countries of these continents “with about 198,000 employees and about 90 plants worldwide” (Ford Motor Company-Annual Report. 2009). Currently, it has a subsidiary called Ford Credit. This subsidiary concentrates on the financial services sector and primarily provides automobile loans to the Ford customers. Besides, it is also engaged in the issuance of commercial papers and debt instruments. The company holds four global brands of the automobiles: Ford, Volvo, Mercury and Lincoln. Earlier, it had two more automobile brands units named Jaguar Land Rover and Aston Martin that have been sold to Tata Motors and a joint venture company respectively. According to the profit and loss income statement, the Ford motor company has divided its income segments into four broad regions that include Ford North America, Ford South America, Ford Europe and Ford Asia Pacific Africa. Table 1 depicts the details by the segments of the automotive sales and the wholesale unit volumes. Table 1: Automobiles Sales Volumes and Wholesales units (Source: Ford Motor Company-Annual Report. 2009) Table 2 shows the result of Ford Credit in terms of revenue and income and loss before tax. Table 2: Ford Credit revenue and income statements (Source: Ford Motor Company-Annual Report. 2009) B. What is the company’s Foreign Exchange (FX) Risk Management Policy? The company is basically a decentralized company. However, The Company follows the strategy of ‘One Ford’ that combines the global business of Ford into one team. The decision making process comes from the top level of management. The topmost management includes a group of executive officers. The Executive Chairman and the Board of Chairman is William Clay Ford, Jr. and Alan R. Mulally is the President and Chief Executive Officer. The global Ford Motor has been divided into regional divisions and each assigned president and managing director is responsible for the operations in that particular region. In each region, there is a head office and several regional offices. The Ford Motor company has to transact in foreign currency as it has payment and receipt transactions in the several foreign lands. It has been engaged in the sales and purchases of finished goods and raw materials, investments in operations and subsidiary dividends. Due to the fluctuations in foreign exchange rates, the company is exposed to two types of risks and these are foreign currency risk and commodity price risk. The company generally hedges these risks with the help of derivatives instruments like swaps, forward, contract etc. In order to compute the balance sheet for the assets and liabilities, the Ford Motor company translates the foreign cash inflow into its operational currency (USD) at the end the period and this requires certain adjustments. After the adjustments, if there will be any surplus or loss then it will considered as gain or loss on investments. Table 3 depicts ‘other comprehensive income’ that has been changed over the years. From the table, it has been observed that during 2008, it had faced loss while adjusting the foreign exchange with the operational currency but in 2009, it has a gain of $2.3 billion. Table 3: Increases/(decreases) in Accumulated other comprehensive income/(loss) resulting from translation adjustments (in billions) (Source: Ford Motor Company-Annual Report. 2009) In the course of its operation the Ford Motor Company is exposed to different types of risks like cross currency risks, interest risk, commodity risks etc. In order to manage these risks, the management of Ford uses different types of derivative contracts. To manage the foreign exchange exposures, forward and option contracts have been used and for the interest rate risks the management uses caps, swap and floors. The commodity price risks are managed with the help of forward and option contracts. The management has designed policies relating to forwards and option contracts to hedge risks associated with cash flows. The fair value hedges are managed by the receive-pay and pay float interest rate swaps. Hedging the net investments is also important for the company and it uses derivatives of the foreign exchange currency for this purpose. The company has framed a set of strategy to handle these types of risk. However, the company has to learn from its past experience and this might take several years to frame proper strategies for managing these risks. C. How does the company use derivatives for funding, investing, and other price risks? In order to hedge all types of risks, the management always tries to enter into the transactions that are effective for offsetting all these risks. The derivatives contracts and other instruments used by the company are over-the-counter which are customized and these are not exchange-traded. The management has set up a team for the hedging activities and this team is responsible for reviewing, measuring and managing these risks with a set of strategy regularly. The management has designed its own hedging instruments and these have been applied in automotives and financial service segments for derivatives. When the management finds that some of the derivatives do not comply with their hedge accounting, they discard those derivatives. D. What is the extent of the company’s offshore and Euromarkets funding and investing activities? As the Ford Motor company is in the global automobile market it has to invest for its foreign operations. Due to the investments in the fixed income instruments and in derivates contracts, the counter party risks arise. In order to meet the required funding, the company has to borrow the required money and primarily, it borrows in two currencies: in US dollars and in euro. However, the company manages its risk by investing in markets of Europe and US. E. Conclusion The Ford Motor Company is a global automobile company and it has expanded in all major markets of the world. As this company has been engaged in the international trade for its operations like buying raw material from the different countries and selling the finished good in different foreign markets, it has to manage different types of risks. The company has developed a team to manage these types of international financial risks. The team is responsible for reviewing and managing risks at a regular basis. As per the table 3 that shows the other comprehensive income statement of adjusting the difference of various foreign currencies. In 2008, the management was proved ineffective to manage these risks as the net adjustment at the end of the years was negative. However, the management has rectified its flaws in managing the international financial risks and in 2009 the company has a positive value after the total transaction adjustments. According to the table 4 the income effect of derivative instruments was negative in 2009. Table 4: Income Effect of Derivative Instruments (in millions) (Source: Ford Motor Company-Annual Report. 2009) This table shows that in both of the segments (Automotives and financial services), the management was unable to manage the risk of the international finance. The management needs to focus on these risks with more attention. The foreign exchange market is always fluctuating and it is very important to study and predict the macroeconomic and other factors that cause the foreign exchange fluctuations. Present strategy of the Ford Motor company does not provide the sufficient shield against these types of risks. If company continues this present strategy, it will affect its profitability that may lead to the shortage of necessary funding for the company. Reference Ford Motor Company. 2010. About Ford: Ford Global. [Online] Available at: http://www.Ford.com/about-Ford/company-information/Ford-international-websites. [Accessed on July 16, 2010]. Ford Motor Company. 2009. Annual Report. [Pdf]. Available at: http://www.Ford.com/doc/2009_annual_report.pdf. [Accessed on July 16, 2010]. Read More