Best Practice Risk Management: Evolving with CFaR
A Q&A with Ford’s Dennis A. Tosh
As a complex, multinational business, risk management is an essential discipline at Ford, particularly with the significant commodity and FX exposures that go along with being a global automobile manufacturer. TMI asked Ford’s Director of Global Trading and Automotive Risk Management, Dennis A. Tosh, to share his experience implementing a Cash Flow-at-Risk, or CFaR, component to the company’s risk management strategy. His insights and pragmatic views will provide other risk professionals with some sound advice in this Spotlight Q&A.
Before we get into how and why you came to look at CFaR as a means to mitigate risk, can you provide us with some brief background on your department?
Our Global Trading and Risk Management department at Ford has a wide remit, covering several key trading activities, including cash investment, hedging, commercial paper pricing and sales. The department is also responsible for risk management for the auto business, including FX, commodities, and credit risk management. We are a capital intensive, cyclical business, so cash flow is one of the most important metrics we use in judging the business, and therefore something that we are very focused on.
Can you talk a bit first about your risk management practice in general?
Yes, this view is helpful in understanding how we think about risk to begin with, because CFaR is really a major step in our progression in risk management as a whole. So, the first tenet of effective risk management, in my view, starts with an organization being able to accurately measure and understand its exposures. This is the basic blocking and tackling of risk management, but it also requires a real partnership between treasury and operating management. After all, the work undertaken by operating management is what creates the exposures to begin with. So, this is where I think most companies fall short – they think of risk management as only a treasury issue, or only the hedging strategy, or whether you use options or forwards, and the like. But I think that is asking the wrong first question. The right first question, the first step in effective risk management, is actually understanding and measuring your exposures.
What types of things are you exposed to?
Because we have a global footprint as a manufacturer, and because we are a dollar based company, we’re short dollars against a lot of currencies around the world. We do a lot of manufacturing in Europe, for example, so there are cross-border flows between Europe and the US. We have a very successful sales operation in Britain and a large manufacturing operation in Continental Europe, so we are short Euro dollars against Sterling, for example. We’re obviously short all kinds of commodities, but it would be useful to know, for example, if our steel exposure provides an offset or is offset by something else. A CFaR module would enable us to do that.
After asking the right first question about your exposures, how do you continue to engage operations?
Well, once we understand those exposures, and figure out what they are on a net basis – because we only hedge net exposures, not gross – we then start thinking about hedging as the tool that helps us buy time, because hedging, after all, is only a temporary solution. All it can really do is buy you time – at least enough for operating management to make changes to the underlying physicals of the business to address the things that gave rise to the exposures to begin with. So unless you understand the underlying physicals, you’re never going to really capture the essence of effective risk management. That is step number two. And once you decide to hedge, I think it is critically important in this brave new world, that you have a very robust, bullet-proof hedge accounting compliance process and system – and our relationship with Reval emphasizes the system side of that.