From the September/October 2012 issue of Treasury & Risk magazine

Bronze AHA Winner in Financial Risk Management

Building a Tool to Show How Risks Are Interrelated: Ford Motor

Ford’s treasury de-compartmentalized its risks by developing a cash-flow-at-risk (CFaR) tool to show how exposures as different as commodity price fluctuation and foreign exchange volatility could be interrelated and that hedging them separately could undo natural hedges.
 

“We knew that there is a diversification benefit among our commodity and currency exposures,” says Dennis Tosh, director of global trading and automotive risk management. “But we didn’t have a robust process or system that could measure it and give us a more realistic view of our net exposures. Now we do.”

To get to that vision, “we needed a comprehensive and integrated system,” Tosh says. After evaluating several solutions, Ford concluded the best source was Reval, software already used by Ford for hedge accounting compliance and hedge valuation.

“We worked extensively with Reval and other consultants to get tools to identify where natural hedges occurred and provide sensitivity analysis to help us keep up with volatility and test the robustness of the statistical model that is subject to the risk that correlations could change significantly,” Tosh explains. “We provided the specifications to address the business needs, and Reval built the module.”

At Ford, CFaR supports a close partnership between treasury and operating management. “Effective risk management is more than a treasury issue since operations creates the exposures,” Tosh points out. For its solution, Ford treasury worked closely with purchasing and product development. The ultimate payoff is not just more efficient management of actual exposures but “an informed risk management strategy that moves decision making further upstream, ahead of major product or sourcing decisions,” Tosh concludes.

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