Study Reveals That Many Companies Have Major Gaps in Their Hedging Practices Exposing Them to Increased Risk
According to a recent study from Chatham Financial that analyzes the financial risk management practices of 1,075 publicly listed corporations in the U.S., more than 75 percent of mid- to-large-sized companies have exposure to foreign currency risk, yet just over half are actively managing this risk through hedging. Similarly, while more than half (53 percent) of the companies studied were found to have exposure to commodity risks, just 43 percent of those analyzed were hedging those risks via financial contracts.
With financial risk management reaching new levels of visibility at the senior management and board levels, these findings indicate that many corporates face considerable challenges in effectively managing their risks. “The way in which corporates manage their risks varies by industry and company size, but companies across the spectrum stand to benefit by better understanding how to approach these challenges,” said Amol Dhargalkar, managing director for risk management services at Chatham Financial.
Drawing from the data uncovered from its State of FRM Study, Chatham Financial cites three main challenges that corporations face in implementing and maintaining active risk management programs:
· Determining how to manage risks holistically throughout the organization and establishing efficient hedges across divisions
· Determining exposures – specifically currency and commodity risks – and developing/implementing corresponding risk management programs
· Implementing an effective hedge accounting program
Many corporations that have exposure to multiple financial risks do not manage their risk holistically; instead, they often hedge through separate departments. In effect, this could mean that the hedges being implemented by the different areas of the company are offsetting one another and potentially increasing earnings risk for the company. “Only by taking a comprehensive view of financial risk management activities can a company ensure they are managing those risks in the most efficient and effective manner possible,” added Dhargalkar.
Another major finding from the State of FRM Study examined companies’ use of hedge accounting to reduce the earnings impact of derivatives used to manage financial risks. The study found that hedge accounting is used by the vast majority of organizations that use derivatives to hedge their financial risks. This includes 80 percent of companies that use derivatives to manage interest rate risk, 66 percent with active currency risk hedging programs, and 60 percent that use derivatives to hedge commodity risk. Within both hedging and hedge accounting practices, the study found significant variability between companies of different sizes and more so across different industries.
The State of FRM Study was conducted through a deep-dive analysis of the 2012 annual fillings of 1,075 randomly selected publicly listed corporations with revenues ranging from $500 million to $20 billion. The study analyzed how companies manage risk exposure by asset class as well as the type of hedging program utilized and the application of hedge accounting by type of risk. This data was combined with insight gleaned from Chatham Financial’s client base of more than 1,200 companies to provide a comprehensive look at the financial risk management issues facing organizations today and how they are being managed.
The full report is available here http://info.chathamfinancial.com/Benchmark2013.html . For more information on financial risk management and the types of solutions provided by Chatham Financial, please visit http://www.chathamfinancial.com/.
