5. Corporate Risk Management: Policies and Implementation. Every good risk- management strategy relies on a sound dose of market assessment and opinion. As a result, corporate finance divisions and treasury groups typically start with detailed market analyses and forecasts to inform their strategic risk-management choices. Analyze BMWs framework for managing financial risks and identify the economic and organizational reasons for their particular approach to FX hedging.

(a) What risk factors does the Group face? Present examples of various the risks in tabular form distinguishing between financial and nonfinancial risks and identifying each risks origin. The table does not need to be exhaustive since most risks are nonfinancial.

(b) Explain BMWs approach to risk management in the context of FX rate forecasting and operations. What is their stated policy and how well have they been doing? Do you see any problems with BMWs approach and implementation?

(c) Why did BMW decide to consolidate FX risk management globally in its Munich group treasury? What principle are they implementing and what are its advantages for the Group?

(d) Evaluate the advantages and disadvantages of various exchange-hedging instruments and techniques. Distinguish financial from nonfinancial risk management approaches.

(e) Which financial hedges does BMW use? What nonfinancial hedges are available to them and how do they use them?

(f) Bonus problem. What differences if any exist in BMWs approach to FX exposure management in North America and Asia?