Why FX Risk Management Is Broken–and What Boards Need to Know to Fix It
(2016) In Journal of Applied Corporate Finance 28(1). p.46-61- Abstract
- This article provides a comprehensive critique of current corporate foreign exchange risk management (FXRM) practices. The authors characterize much of FXRM as a “legacy” activity, a set of outdated, often decentralized and “earnings-driven” methods and procedures that have not been subjected to rigorous cost-benefit analysis at the enterprise level. And according to the authors, the costs of poorly designed and executed FXRM have increased sharply in recent decades because of the growing demand by analysts and investors for cost-efficiency, transparency, and predictability.
After discussing six ways in which the FX policy of most large multinationals fails to serve the interests of their investors and other important... (More) - This article provides a comprehensive critique of current corporate foreign exchange risk management (FXRM) practices. The authors characterize much of FXRM as a “legacy” activity, a set of outdated, often decentralized and “earnings-driven” methods and procedures that have not been subjected to rigorous cost-benefit analysis at the enterprise level. And according to the authors, the costs of poorly designed and executed FXRM have increased sharply in recent decades because of the growing demand by analysts and investors for cost-efficiency, transparency, and predictability.
After discussing six ways in which the FX policy of most large multinationals fails to serve the interests of their investors and other important stakeholders, the authors offer the following: (1) a restatement of the goals of FXRM; (2) an illustration of various ways of implementing a largely (if not completely) centralized approach to FXRM; (3) a proposal for aligning performance evaluation and executive pay with the goals of FXRM; (4) suggestions for improving decision-support tools in relation to FXRM; (5) proposals for integrating FXRM into an enterprise-wide risk management system, which include shifting responsibility for FXRM from the Finance/Treasury group to a centralized risk committee (typically under a Chief Risk Officer who reports to the board of directors); and (6) suggestions for improving communication of a company's risk management policies and practices to investors and other stakeholders.
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Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/46eb3ee8-a4d9-420c-8f45-974c448a515a
- author
- Jankensgård, Håkan LU ; Oxelheim, Lars LU and Alviniussen, Alf
- organization
- publishing date
- 2016-04-27
- type
- Contribution to journal
- publication status
- published
- subject
- keywords
- risk committee, integrated risk management., transparency, foreign exchange, risk Management
- in
- Journal of Applied Corporate Finance
- volume
- 28
- issue
- 1
- article number
- 28
- pages
- 16 pages
- publisher
- John Wiley & Sons Inc.
- ISSN
- 1745-6622
- DOI
- 10.1111/jacf.12158
- language
- English
- LU publication?
- yes
- id
- 46eb3ee8-a4d9-420c-8f45-974c448a515a
- alternative location
- http://www.ifn.se/eng/publications/wp/2015/1078
- date added to LUP
- 2016-11-10 10:12:44
- date last changed
- 2018-11-21 21:27:16
@article{46eb3ee8-a4d9-420c-8f45-974c448a515a, abstract = {{This article provides a comprehensive critique of current corporate foreign exchange risk management (FXRM) practices. The authors characterize much of FXRM as a “legacy” activity, a set of outdated, often decentralized and “earnings-driven” methods and procedures that have not been subjected to rigorous cost-benefit analysis at the enterprise level. And according to the authors, the costs of poorly designed and executed FXRM have increased sharply in recent decades because of the growing demand by analysts and investors for cost-efficiency, transparency, and predictability.<br/><br/>After discussing six ways in which the FX policy of most large multinationals fails to serve the interests of their investors and other important stakeholders, the authors offer the following: (1) a restatement of the goals of FXRM; (2) an illustration of various ways of implementing a largely (if not completely) centralized approach to FXRM; (3) a proposal for aligning performance evaluation and executive pay with the goals of FXRM; (4) suggestions for improving decision-support tools in relation to FXRM; (5) proposals for integrating FXRM into an enterprise-wide risk management system, which include shifting responsibility for FXRM from the Finance/Treasury group to a centralized risk committee (typically under a Chief Risk Officer who reports to the board of directors); and (6) suggestions for improving communication of a company's risk management policies and practices to investors and other stakeholders.<br/>}}, author = {{Jankensgård, Håkan and Oxelheim, Lars and Alviniussen, Alf}}, issn = {{1745-6622}}, keywords = {{risk committee; integrated risk management.; transparency; foreign exchange; risk Management}}, language = {{eng}}, month = {{04}}, number = {{1}}, pages = {{46--61}}, publisher = {{John Wiley & Sons Inc.}}, series = {{Journal of Applied Corporate Finance}}, title = {{Why FX Risk Management Is Broken–and What Boards Need to Know to Fix It}}, url = {{http://dx.doi.org/10.1111/jacf.12158}}, doi = {{10.1111/jacf.12158}}, volume = {{28}}, year = {{2016}}, }