Effectiveness of Risk Management Strategies and Challenges Ahead?
In Part I of my Financial Risk Management in Treasury blog series, I discussed mitigating, identifying and defining financial risk.? In Part II, I described various types of risk. In Part III, I reviewed risk measurement methods. In Part IV, I will detail the effectiveness of treasury risk management strategies and the challenges that lie ahead for many financial professionals.?
Overall, only 6.3 percent of respondents in a recent SunGard AvantGard study* felt their risk management systems were below average. While the study turned up some indications that there may be room for improvement, the overall sense among treasurers was that their systems were satisfactory. When asked specifically how they felt regarding the reliability of their cash forecast as a support basis for either foreign exchange hedging or investment, most treasurers indicated some degree of reliability.
Measuring the effectiveness of hedging strategies is a required compliance practice under global accounting standards. Several measurements can be used to determine the level of effectiveness of hedging. When asked how they monitor the effectiveness of hedging programs, 38.1 percent of corporate treasurers identified the dollar-offset method as most frequently used. The critical terms match was almost as often employed, with 37.4 percent of respondents utilizing this method. The regression method was used least regularly, but still utilized by 24.5 percent of financial professionals. In the write-in response area, some respondents indicated either that they do not hedge or that their business was naturally hedged.
Given the concern made obvious in the study regarding market risk, it is not surprising that treasurers identified market volatility their greatest worry in the coming two years, followed by Eurozone defaults, counterparty risk, commodity prices, and the Dodd-Frank Act.
Looking back across the four-part series, I?ll summarize the Risk Management study by stating accurate risk measurement enables effective risk management. Companies are increasingly aware of the need to measure risk and monitor areas of exposure and are taking steps to ensure the security and integrity of risk reporting tools. Going forward, technology issues may surface. The use of spreadsheets in risk management actually exposes a company to operational risk, from simple keystroke errors to accidental circular references that can invalidate an entire workbook, spreadsheet risk is practically unavoidable.
Technology issues related to implementing manual processes without the benefit of a real-time view may also surface. Having a real-time view enables better liquidity management. Without real-time access to accounts and view of markets, companies are lacking a key element to risk management.
With the growing acceptance of cloud-based TMS (treasury management system) technology, more companies are choosing to reduce their technical involvement in operating a TMS by essentially outsourcing the infrastructure requirements. This enables quicker upgrades and updates if and when regulatory changes occur.
The key for corporate treasurers is to understand the importance of identifying and managing risk?and the widespread effects mismanagement can have on the company. Investments in technology are an ongoing concern and should be carried out thoroughly and effectively.
[* SunGard AvantGard recently conducted a study of 222 treasury professionals in the second quarter of 2012 to better understand how corporations are addressing various aspects of financial risk. The study included respondents from around the world spanning a broad range of industry and revenue classifications, with over 62 percent of respondents from companies with more than $1 billion in revenue. ]
What are your future challenges in financial risk management?? I?d like to hear from you.
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