MODELING CORPORATE RISK AT FORD Freeman Wood Director

MODELING CORPORATE RISK AT FORD Freeman Wood Director Global Risk Management

WHAT IS CORPORATE RISK MANAGEMENT Ø Ø Ø Risk exists in everything we do as a company -- why is it important to understand 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 2

RISK MANAGEMENT EVOLUTION Ø Began with large financial institutions Ø Ø Naturally focused on financial risks and capital management Ø Ø Investment banks are in the business of taking risk Market risk Credit Risk Operational Risk Enterprise-wide Impact of changes in MTM and on the balance sheet and income statement Short horizon / holding period Corporate Risk Management: Risk mitigation / transfer Ø Ø Ø 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 3

WHY IS INTEGRATED RISK MANAGEMENT IMPORTANT? 1. In The Past: 1. The corporate focus has been on profits 2. Now: 1. Corporations are now focused on maximizing shareholder value. So how is this done? 3. Future: 1. Reduce income volatility: the probability of financial difficulty is reduced, funding is less costly 2. Ensure liquidity 3. Capital efficiency: Risk adjusted capital allocation and risk-adjusted return assessment: Optimize profits relative to risk 4. Maximize shareholder value added 4

WHERE DOES PROPER RISK MANAGEMENT BEGIN? Where do you start and what are the key drivers 1. 2. 3. A Culture of Risk Understanding Must be Established Senior Management and Business Support How is this done: Establish objectives, what do you want to achieve and how will it add value 1. Comprehensive identification of risks across functions 2. Develop a integrated structure and complete coverage 3. Better understanding of returns relative to risks 4. How will value be added to the company 5. Continue to question and improve risk evaluation methodologies 5

RISK MANAGEMENT PROCESS THE EVOLUTION OF SOUND RISK MANAGEMENT Corporate Culture Identification Measurement Management Performance Measurement 6

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

Evolution of Ford Risk Management Scope and Risk Identification Overall Business Risk t i re n y n E pa m Co Operations Risk Financial Analysis/ Risk Assessment tive o t om u A ce n a F in Financial Risk u ry s a T re 8

RISK MANAGEMENT PROCESS THE EVOLUTION OF SOUND RISK MANAGEMENT Corporate Culture Identification Measurement Management Performance Measurement 9

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

CURRENT APPROACH Ø 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 Va. R for FX (since 1997) Earnings at Risk (Ea. R) Ø Interest Rate Risk § Highly quantitative assessment of asset / liability risk including hedging products § § § Net Interest Income (Ea. R) and Duration of Equity Cash portfolio management and IR and FX trading co-located Duration and Va. R for cash portfolio Analysis of diversification benefits of combined FX and interest rate portfolio as well as Va. R weakness 11

CURRENT APPROACH Ø Counterparty Risk § § 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 Ø 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 12

FUTURE APPROACH What do we intend to build? Ø Global, integrated risk management process that assesses interest rate, FX, commodity, liquidity, and counterparty/issuer risks within a unified structure and technology platform Ø 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. Ø Use of capital markets and insurance markets solutions to mitigate/transfer specific risks and better understand our global risk profile 13

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

BENEFITS OF BETTER RISK MANAGEMENT Ø 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 § Ø 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 15