Citi’s corporate solutions group has released analysis of a survey it had undertaken of the risk management used by corporations.
It’s no surprise that most companies have re-examined their policies in the wake of the financial crisis. Some 43% of respondents changed the mix of counterparties used, a third of companies now hedge smaller amounts of their exposures while a third also say that they have shortened the hedging tenor. Worryingly, 6% say that they have stopped hedging altogether. The survey received more than 300 responses.
Although, since the financial crisis, 17% more respondents hedge using currency options (53% of respondents now hedge with options in some form), it is still FX forwards that dominate corporate hedging. Options are not only used to hedge contingent risks but also when business forecasts are less certain. However, long-dated hedges are generally established in smaller amounts. Interestingly, North American companies tend to maintain a higher hedge ratio than companies in other regions when hedging forecasted exposures within a one-year horizon; why this is so is unclear.
Most companies will only tolerate a limited earnings impact from hedging an economic risk that does not qualify for hedge accounting. Accounting treatment also has an effect on the hedging instrument used. According to the report, Asia-Pacific companies, “being less consumed with accounting treatments”, are three times more likely to use barrier options than North American companies “as barrier options are very likely to be problematic from a hedge accounting perspective.”
The compression of spreads seen in the last few years may have improved overall price efficiency but operational efficiencies are most commonly cited as the reason to trade electronically; 38% said this was their prime reason while “only 28% of the respondents believe that electronic execution offers better pricing than dealing over the phone.” Also “while a majority (85%) of the respondents use multi-bank portals, only 5% use portals to execute large trades.”
Finally, a fillip for those looking to extol the value of research offerings: “Market view plays a large role in how hedges are implemented, particularly with regards to the timing of when the hedges are entered.”
