This framework, combined with scenario analysis capabilities, has enhanced foreign exchange understanding and integration into operating decisions."
"In addition to supporting hedging strategies, this also provides a management framework to support longer-term strategic decisions that can influence the exposure profile over time. Recently, we've developed a portfolio view of foreign exchange exposures across the company to assess and manage risk more holistically," says Schaaf. "Historically, Ford has managed foreign exchange risk associated with each currency exposure on an independent basis.
As one example, treasury analysis of the Ford's foreign exchange exposures is being factored into big, strategic decisions, such as the location of assembly plants – where natural hedges can be achieved by manufacturing and selling in the same currency, the benefits are taken into account. The new and improved treasury function has a bigger voice in the boardroom too. "As a result, hedging strategies have been developed to achieve the same risk reduction with lower cost and the use of fewer derivatives," says Schaaf.
Stress testing, scenario planning and sensitivity analysis now play a bigger role in decision-making, and new risk models have given a better understanding of the correlations and diversification benefits across portfolio exposures. The consolidated treasury risk management function's toolkit has also been upgraded. "Now, these hedging activities have been consolidated into a single treasury risk management function, and we're approaching it with a more holistic focus on the macro environment, risk relationships and potential strategic implications for the business." "Prior to the financial crisis, risk management activities, such as currency and interest rate hedging, were done by separate treasury departments," says Brian Schaaf, an assistant treasurer at Ford's corporate headquarters in Dearborn, Michigan, on the outskirts of Detroit.
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