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MODELING CORPORATE RISK AT FORD Freeman Wood Director Global Risk Management.

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Presentation on theme: "MODELING CORPORATE RISK AT FORD Freeman Wood Director Global Risk Management."— Presentation transcript:

1 MODELING CORPORATE RISK AT FORD Freeman Wood Director Global Risk Management

2 2 WHAT IS CORPORATE RISK MANAGEMENT  Risk exists in everything we do as a company -- why is it important to understand and manage it? What’s the value?  Risk management is about understanding the implications of our operating environment and the decisions we make.  It is also about exploring different ways to reduce uncertainty and maximize returns relative to risk => Capital Allocation  It starts with those closest to the risks: Business Units  Successful risk management is a collaborative effort between risk experts and our business partners – together we make better decisions

3 3 RISK MANAGEMENT EVOLUTION  Began with large financial institutions  Investment banks are in the business of taking risk  Naturally focused on financial risks and capital management  Market risk  Credit Risk  Operational Risk  Enterprise-wide and  Impact of changes in MTM and on the balance sheet and income statement  Short horizon / holding period  Corporate Risk Management: Risk mitigation / transfer  Began with hedging of financial risk /cash flow (FX flow, NII) and hazard risk (property/casualty)  Income statement focus, less focus on capital/equity management  Longer horizon  Unique risk profile  Integrated risk assessment including:  Financial, business, insurance, regulatory & operations risk

4 4 WHY IS INTEGRATED RISK MANAGEMENT IMPORTANT?  In The Past:  The corporate focus has been on profits  Now:  Corporations are now focused on maximizing shareholder value. So how is this done?  Future:  Reduce income volatility: the probability of financial difficulty is reduced, funding is less costly  Ensure liquidity  Capital efficiency: Risk adjusted capital allocation and risk- adjusted return assessment: Optimize profits relative to risk  Maximize shareholder value added

5 5 Where do you start and what are the key drivers WHERE DOES PROPER RISK MANAGEMENT BEGIN? Where do you start and what are the key drivers  A Culture of Risk Understanding Must be Established  Senior Management and Business Support  How is this done: Establish objectives, w hat do you want to achieve and how will it add value  Comprehensive identification of risks across functions  Develop a integrated structure and complete coverage  Better understanding of returns relative to risks  How will value be added to the company  Continue to question and improve risk evaluation methodologies

6 6 RISK MANAGEMENT PROCESS Corporate Culture IdentificationMeasurementManagementPerformance Measurement THE EVOLUTION OF SOUND RISK MANAGEMENT

7 7 FORD RISK MANAGEMENT PURPOSE STATEMENT AND VISION To To improve the business’ ability to understand, manage, and mitigate global corporate risk in real time, In such a way that In such a way that we make better risk/return decisions and manage capital more efficiently, So that So that shareholder value materializes and unforeseen risks do not.

8 8 Evolution of Ford Risk Management Scope and Risk Identification Financial Risk Financial Analysis/ Risk Assessment Operations Risk Overall Business Risk Treasury Finance Automotive Entire Company

9 9 RISK MANAGEMENT PROCESS Corporate Culture IdentificationMeasurementManagementPerformance Measurement THE EVOLUTION OF SOUND RISK MANAGEMENT

10 10 MEASUREMENT AND MANAGEMENT: WHERE TO BEGIN? Break Down the Barriers  Mentally  See the broad picture: Not by individual business units  Recognize the links and common exposures across the organization  Organizational  Get all the people who think about and manage risk together to capitalize on synergies: Financial and hazard risk managers  Systems and Technology  Data integration and management is critical  Strong analytics that span risk factors and functions  Use multiple risk assessment methods/tools

11 11 CURRENT APPROACH  FX and Commodities  Strong ability to identify current and future transaction risk  Exposures centrally aggregated and risk managed in one location  Risks reported in terms of positions (e.g. net currency positions), risk to individual currency movements (scenarios based on historic and estimated future volatility), and VaR for FX (since 1997)  Earnings at Risk (EaR)  Interest Rate Risk  Highly quantitative assessment of asset / liability risk including hedging products  Net Interest Income (EaR) and Duration of Equity  Cash portfolio management and IR and FX trading co-located  Duration and VaR for cash portfolio Analysis of diversification benefits of combined FX and interest rate portfolio as well as VaR weakness

12 12 CURRENT APPROACH  Counterparty Risk and  New approach to assessing current (MTM) and future (potential) risk  Web-based integrated assessment of risk across business units  Revised limits approach  System allows for assessing the impact of hedging actions on counterparty risk and overall liquidity: Trading market risk for counterparty risk  Hazard / Catastrophic Risk  Global corporate insurance programs: Property, Casualty, D&O, etc.  Captive insurance entity  Retention analysis  Claims interface with Legal, Insurers, and Business Operations  Insurance products to manage financial risks  Understanding business interruption risk leads to a broader understanding of Operational Risk

13 13 FUTURE APPROACH What do we intend to build?  Global, integrated risk management process that assesses interest rate, FX, commodity, liquidity, and counterparty/issuer risks within a unified structure and technology platform  The risk assessment process will integrate corporate insurance and the inter-relation of financial market risk with operational risk to provide a complete picture of total enterprise exposure.  Use of capital markets and insurance markets solutions to mitigate/transfer specific risks and better understand our global risk profile

14 14 BRIDGING THE GAP What are some of the specific steps we intend to take to integrate risks?  Counterparty risk system: Basis for a broader technology platform  Integration of specific market risks: Interest Rate risk  Retention analysis: Building a framework for determining our tolerance for hazard risk as well as other types of risks  Begin to explore cross-market products/solutions for hazard and financial risk mitigation  Partner with ERM service providers?

15 15 BENEFITS OF BETTER RISK MANAGEMENT  Better internal understanding of risk  Provide more comprehensive information to strategic business units allowing for better understanding of risk and better allocation of capital  More comprehensive understanding of risk and return implications of decisions made by the individual business units.  Provide more timely, comprehensive and integrated view of global exposures across business units to senior management  Better understanding of operating risks and the coverage of that risk through insurance products  Added value to shareholders  Better understanding and management of risk will reduce income volatility and better protect equity value  Less income volatility will lead to cheaper cost of funds  More efficient allocation of equity capital to higher return, lower risk areas  Better understanding of natural hedges and off-sets within the company

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