Corporate treasurers are exploring the use of more complex risk management techniques to better balance liquidity and earning risk and minimise foreign exchange losses, according to results of a Bloomberg survey.
More than 100 corporate treasurers, financial analysts and risk managers responded to the poll, which found that Cash Flow at Risk (CFaR) and Earnings at Risk (EaR) have gained recognition as the latest risk management solution. Results show that 34% of respondents already use CFaR or value at risk (VaR), 29% are considering using it, and only 8% have never heard of it. The poll also revealed that 64% of respondents said they need to improve or are considering improvements to their company’s current hedging policy.
However, when asked what obstacles stood in the way of adopting a CFaR-based hedging policy, 66% of respondents cited the difficulties of explaining the policy internally and to the board. Another obstacle is technology: 41% of respondents cited that their company is reluctant to change its current technology. The discussion also surrounded the importance of key performance indicators (KPIs).
“For cash flow and earnings volatility, companies are shifting away from the outdated percentage hedging model to a risk management perspective, as they are not able to tie their old strategies to the KPIs the board is demanding,” said Mark Lewis, Corporate Treasury Product Manager at Bloomberg.
Explaining the policy internally and updating technology were not the only challenges respondents cited in implementing CFaR & EaR. Respondents were also concerned that such a policy would be too complex (29%), that it could be too costly to implement and run (26%), or that it would not provide sufficient benefit (13%).
The poll was conducted during Bloomberg’s recent online webinar “The Benefits of CFaR and EaR for Corporate Risk Management”, to discuss how CFaR and EaR can better explain the risk of earnings and cash flow volatility to their financial statements.
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