Study Quantifies Financial Risk Management Challenges for US Corporates

More than three in four mid to large-sized publicly listed US corporations have exposure to foreign currency risk, yet little more than half are actively managing the risk through hedging, a survey from Chatham Financial suggests.

The financial risk management advisory service analysed the financial risk management practices of 1,075 listed US corporations and also found that 53% of the companies studied had exposure to commodity risks, but just 43% of those analysed were hedging those risks via financial contracts.

The firm added that with financial risk management reaching new levels of visibility at the senior management and board levels, the findings indicated 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.

Data from the study shows three main challenges that corporations face in implementing and maintaining active risk management programmes:

  • Determining how to manage risks holistically throughout the organisation and establishing efficient hedges across divisions.
  • Determining exposures – specifically currency and commodity risks – and developing/implementing corresponding risk management programmes.
  • Implementing an effective hedge accounting programme.

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.

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