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Study: US Corporates Hedging Less FX Exposures

A recent
study from Chatham Financial finds that less US corporates are hedging their
currency, interest rate and commodity risk exposures than three years ago.

The study,
which analyses the 2015 financial risk management practices of more than 1,500
publicly listed corporations in the US, found that the number of overall
companies utilising currency and commodity hedges fell three percent from 2012
to 37% last year.

It also
found that only 55% of firms with exposure to currency risk actively manage
this risk through the use of financial hedges. Meanwhile, the percentage of
firms hedging their commodity and interest rate risk exposures was 49% and 37%
respectively.

“Given
the tremendous levels of volatility in currency markets over the past several
years, it’s surprising to see that fewer companies are electing to hedge
against exposures in this asset class,” says Amol Dhargalkar, managing director
of Chatham Financial’s global corporate sector.
Chatham Financial notes that growth in Europe, Canada, China, and Japan and
recessionary environments in Brazil, South Africa, and Russia have had an
impact on the ability of firms to forecast swings in FX rates. As a result, it
says that some firms – especially newer entrants to the global markets – are
putting off hedging for the time being.
“This practice will likely continue until these firms feel comfortable in
their ability to predict business patterns and forecasts,” adds
Dhargalkar. “Unfortunately, this can result in the business being exposed
to enormous downside risk as currencies fluctuate, be it from singular ‘shock’
events or longer-term trends.”
Predictably, the study found that larger companies tended to have greater exposure
to risks. For example, 75% of large firms (those with annual revenues of $5-$20
billion) reported having FX exposure, with just 58% of smaller firms (revenues
of $500 million to $1 billion) stating so.

However,
smaller firms are equally less likely to hedge exposures to all forms of risk.
While 69% of large companies hedged their FX risks in 2015, just 39% of small
companies did so, according to the study.
“Hedging programs require sophisticated teams and dedicated resources,
which just isn’t an option for many smaller firms,” says Dhargalkar.
“Larger firms are naturally better positioned to plan and execute a robust
internal hedging practice.”
But Chatham Financial warns that the exposure faced by smaller firms can be
especially dangerous in a volatile climate, as these firms tend to have fewer
natural hedges against risks elsewhere in the business.

“While
some firms are perfectly well-founded in taking a strategic ‘wait and see
approach’ to hedging, many of those who don’t hedge do so simply because of
their inability to manage these rigorous processes internally,” says Dhargalkar.

Colin Lambert

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