Data doubts undermine treasury use of risk quantification
Lack of confidence in the quality of their information – and their ability to analyze it – means many of the world’s largest companies continue to eschew one of the techniques designed to assess and manage FX risk.
A recent report from Greenwich Associates found that 60% of corporate treasury professionals felt it was not possible to establish best practices for FX. Yet only one in five of the large companies surveyed employ the variance at risk (VaR) framework – such as earnings at risk or cash flows at risk – despite its suitability for precision hedging strategies.
Cash flow at risk and earnings at risk take into account the relative volatilities and correlations of individual currencies when designing hedging strategies and incorporate cash flow and earnings implications in addition to payments.
“However, the methodology requires relatively good information management and access to sophisticated tools and datasets,” says Ken Monahan, senior analyst in Greenwich Associates’ market structure group and author of the report. “Many firms do not pursue the latter because they do not believe they can achieve the former.”
One of the reasons put forward for the low level of VaR usage was that companies have little confidence in the quality of their own data.
“The first step in a financial risk-management framework should be to identify the underlying exposures,” says Sander de Vries, senior manager at Netherlands-based treasury consultancy Zanders.