US corporations are taking a conservative, status quo approach when it comes to managing risks, according to a new survey. Almost two-thirds of the respondents to a Bank of America Merrill Lynch survey agree that their primary interest-rate risk management objective is to reduce economic risk. Cash-flow optimization and stabilization of earnings are also popular objectives, the survey said.
BAML’s 18th annual corporate risk management survey focuses on interest rate and foreign exchange risks, while also touching on derivative accounting and execution. BAML FX strategist John Shin, who conducts the survey, was recently a guest speaker at The NeuGroup Network’s Engineering and Construction Treasurers’ Peer Group (E&CTPG) meeting.
The survey showed that overall fixed debt levels have not changed much over the past year. Also revealed: LIBOR continues to be used overwhelmingly as a floating-rate index (88 percent) and hedges from 1-6 months are the most popular duration; but that falls off rapidly past 12 months.
Corporates remain conservative, using hedges to reduce risk and not for internal positioning as shown by the two-thirds 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 percent 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.
Shy on full coverage
Of those respondents who do hedge balance sheets, the majority report less than 100 percent 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 percent) and concern over forecast error, as evidenced in the survey, is the primary driver for final hedge coverage being below the 100 percent mark.
FX forwards still the instrument of choice, with 74 respondents saying they use them; FX options are a second choice. Most frequent FX hedge tenor reported was less than three months (62 percent).
An overwhelming majority (90 percent 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.