Vast Majority of Companies Using Financial Derivatives to Hedge Risk
The 2010 Fincad Corporate Finance Survey has found that 83% of corporates are continuing to use derivatives to hedge risk. However, as a result of the financial crisis, more corporate treasuries have taken measures to adjust their risk management strategy with increasingly required checks and balances in place.
Corporates are now more proactive in implementing industry best practices. Most corporate treasuries use a third-party solution to value their derivatives with some using multiple vendors to benchmark their valuations. In addition, 44% are now running scenario/sensitivity analysis and 40% are calculating value at risk (VaR).
The results also demonstrate that over 45% of corporates need to calculate credit value adjustment (CVA) for their derivatives valuations. This is significantly up from last year when very few companies were required to run CVA.
“The financial crisis has demonstrated that relying on counterparty prices is no longer acceptable as more robust risk management practices are being put into place,” said Bob Park, president and chief executive officer (CEO), Fincad. “More than ever, auditors are requiring their corporate clients to conduct independent third-party valuations of their derivatives to validate their counterparty prices in order to comply with current regulatory standards.”