Bank of America Merrill Lynch has released its 18th annual corporate risk management survey, with insights from over 200 firms across the globe. The survey focuses on interest rate and foreign exchange, while also touching on derivative accounting and execution. John Shin, the BAML FX strategist who runs the survey, was recently a guest speaker at The NeuGroup Network’s Engineering and Construction Treasurers’ Peer Group meeting, where he presented insights into the US economy.
Here are some of the survey highlights:
A conservative, status quo approach to risk management
Almost two-thirds of the respondents agree that their primary interest rate risk management objective is to reduce economic risk; with optimization of cash flows and stabilization of earnings also popular objectives.
The survey showed that overall fixed debt levels have not changed much over the past year. LIBOR continues to be used overwhelming for a floating rate index (88%) and hedges from 1-6 months are the most popular duration, dwindling off rapidly past 12 months.
Corporates remain conservative, using hedges to reduce risk and not for internal positioning as evidenced by the 2/3 of respondents that do not terminate hedged positions early for mark-to-market purposes. One-third use pre-issuance hedges; a combo of treasury and swap locks or used individually being the most common and options less frequently used.
Minimizing balance sheet exposure is by far the most common objective of FX risk management.
77% of respondents had no change in instrument use, and there was a very slight pickup in FX hedging in general with slightly longer tenors for some respondents. The survey reports option hedging is used more often for contingent exposures due to M&A activity and bids, and currency swaps more often for net investment hedges.
Exposure uncertainty is driving corporate treasury to be shy on full coverage.
Of those respondents who do hedge balance sheets, the majority report less than 100% exposure hedging due to “exposure uncertainty." Further breaking down the results, for FX exposures survey respondents noted the uncertainty of forecasted exposures limit coverage. This is a common complaint among treasury groups. FX forecast variability (64%) and concern over forecast error, as evidenced in the survey, is the primary driver for final hedge coverage being below the 100% mark.
FX forwards remain the instrument of choice (74%)
No surprise here with FX options a scant second choice. Most frequent FX hedge tenor reported was less than three months (62%).
An overwhelming majority (90% range) reported no effect on hedging types and methods because of Dodd-Frank, while a smaller majority plans on filing for an end-user exemption on clearing/margining.
The NeuGroup Network’s Engineering & Construction Treasurers’ Peer Group (E&CTPG) bring together treasurers from the largest multinational companies in the engineering and construction industry to share experiences and best practices with their peers. E&CTPG is one of 15+ NeuGroups (www.neugroup.com) representing more than 300 members at 180+ companies.