Market-price risk is a top enterprise concern at World Fuel Services (WFS), a Miami-based Fortune 500 company with a global presence in the price-volatile fuel products market. WFS was identified as a Trendsetter in the recent survey conducted by the Milliman Risk Institute of 125 North American risk executives on the state of their companies’ ERM efforts (see part 3 for information about the Beginners, Transitionals, and Trendsetters levels).
WFS provides marketing, sales, and distribution of a wide range of marine, aviation, and land fuels through more than 3,000 service locations worldwide, and has traditionally made extensive use of derivative products to provide hedging for customers and suppliers as well as its own positions.
“I think of ERM as managing enterprise price risk across all our many lines of business,” says Aftab Saleem, vice president, enterprises and derivative risk at WFS. “It may be price risk inherent in contracts, inventory, or trading activity.”
Management of price risk begins in the early stages of any new business. The company has a vetting committee that looks at each new commercial opportunity, identifying a risk range and risk appetite that it can translate into numbers and manage. This includes factors such as market value at risk, the stop-loss limit, and other restrictions that the team might want to put in place.
This proactive approach applies at the everyday trading level as well. WFS’s trading book has a stop-loss limit set for each quarter. This triggers discussions to manage the book’s exposure to market-price risk.
Managing enterprise risk is evolving at WFS, however, particularly in how it supplies management with data that enable forward-looking decisions—a defining quality of companies that create value through ERM.
WFS has two initiatives to push the program to the next level.
The company is taking a more fine-grained approach to risk as an element of strategic planning. WFS has divided its business into multiple units and assessed each for its embedded risks, measured against returns. It looks at historical performances as well as forecasts over three years. The results are overlaid on a risk/return framework, forming a basis for management decisions.
Mr. Saleem is also developing a cash-flow-at-risk model that will show the net position at risk across a broad range of commodities and allow simulations showing the impact on the cash position. “Each type of fuel has different units of measurement and different prices,” he says. “We translate these into one common unit of measure and price, using an underlying conversion factor, and we use that number for simulations.”
In the concluding Part 7 of this blog series, we present a list of action items for Beginners and Transitionals interested in moving along the spectrum of ERM to become a Trendsetter.
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For more information, please contact Mark Stephens.