Photo of Peter Seward, Reval and Mark Turner, Ford accepting on behalf of Dennis Tosh.

As a global automobile manufacturer, Ford has significant risk exposures. The wide remit of its Global Trading and Risk Management department covers several key trading activities, including cash investment, hedging, commercial paper pricing and sales, as well as FX, commodities and credit risk management.

Given the capital intensive, cyclical nature of the business, cash flow is one of the most important metrics Ford uses in judging its performance. The treasury department, under Ford’s Director of Global Trading and Automotive Risk Management, Dennis Tosh, follows the principle of being able to accurately measure and understand its exposures before any action is taken. Tosh felt it would be useful to know, for example, if the company’s steel exposure provides an offset for or is offset by something else.

“Ford didn’t have the ability to evaluate how those exposures interacted with each other. From time to time, the company would request advice from its bank and dealer partners on this, but without the in-house capabilities and arithmetic knowledge for accurate analysis, it is a relatively dangerous tool to operate,” says Tosh. Ford came to the conclusion that the best solution was to develop a CFaR capability. “This would allow us to think about how these exposures play off of each other in correlations, to better understand what the net exposure is and to be more strategic in looking at managing risk.”

For CFaR, the treasury team did not want to go out and get yet another system and face the issue of building interfaces. Its goal was to move towards an integrated system because of the efficiencies this would provide in terms of support and maintenance, and the focus it would give back to the team on building the product. Ford’s treasury decided to use Reval to build off of the already solid investment it had in the provider. “The aim was to achieve an integrated system that could help move the risk management discipline forward from simply compliance to analysis,” Tosh remarks.

With a good handle on knowing what its exposures were and how they were created, Ford could think about how the exposures played off of each other in correlations and the treasury team could now do the analysis themselves. With Reval’s CFaR capabilities in-house, Ford could now see through to the arithmetic behind the analysis, and control its own fate. “Until this point, we could not measure how important some exposures were over others,” admits Tosh.

Ford has now succeeded in reaching a solution that does not just look at how exposures net, but also works with other departments to develop an understanding what kind of exposures are more important than others to stakeholders. Also, by better understanding the risks inherent in its global commodity and FX exposures on a standalone and portfolio basis, Ford has been able to improve its hedging decisions.

Using Reval’s solution, the company has established a robust infrastructure and process for hedge accounting and compliance, minimising time and resources spent on keeping up with evolving regulations and enabling a more strategic focus on hedging strategies. “This has also prompted a total review of the company’s hedging strategy. We are moving towards a more strategic and selective hedging policy,” says Tosh.

Ford uses CFaR instead of other methodologies, like value at risk (VAR), because it wants to hedge the economic exposure to the company. Having a way to view, analyse and execute exposures using advanced capabilities, such as an integrated CFaR module, as part of its risk management discipline, Ford is now moving decision-making further upstream, ahead of major product or sourcing decisions.