Hedge Effectiveness Testing and Risk Remain Biggest Treasury Challenges

FINCAD has released the results of its corporate finance survey which has revealed that 27% of survey respondents listed hedge effectiveness testing as the biggest challenge they currently faced with respect to derivatives.

While hedge effectiveness continues to represent a major challenge, risk, in particular accurate risk assessment (29%), was also top of mind for treasurers. In response, 69% of respondents reported taking steps to adjust their risk management strategy, including running scenarios/sensitivity analysis and calculating value-at-risk (VaR).

As a matter of best-practice, corporations should calculate the credit value adjustment (CVA) on all of their over-the-counter (OTC) derivative transactions. Despite 75% of respondents using derivatives in their portfolio, only 40% felt that they needed to calculate the CVA for their derivatives valuations. Without CVA in their calculation, corporate treasuries face potential adjustments in their books if their auditor’s valuations are different from their own.

With all of the regulatory changes on the horizon, the majority (88%) of corporate treasuries felt that they would need to change the way they are doing business. Fifty-one percent of respondents anticipated that the impact would be minimal, with minor changes needed, 30% thought that the impact would be moderate and notable changes would be needed, and 6% expected to make significant changes. Only 12% felt that they were well-prepared for the regulations that lie ahead.


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