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Why FX Risk Management Is Broken–and What Boards Need to Know to Fix It

Jankensgård, Håkan LU ; Oxelheim, Lars LU and Alviniussen, Alf (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 The authors characterize much of FXRM as a “legacy” activity, a set of outdated, often decentralized and “earnings-driven” methods and procedures that have not been subjected to rigorous cost-benefit analysis at the enterprise level.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 The authors characterize much of FXRM as a “legacy” activity, a set of outdated, often decentralized and “earnings-driven” methods and procedures that have not been subjected to rigorous cost-benefit analysis at the enterprise level.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:
author
organization
publishing date
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
pages
16 pages
publisher
John Wiley & Sons
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
2016-11-15 10:15:16
@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/>},
  articleno    = {28},
  author       = {Jankensgård, Håkan and Oxelheim, Lars and Alviniussen, Alf},
  issn         = {1745-6622},
  keyword      = {risk committee,integrated risk management.,transparency,foreign exchange,risk Management},
  language     = {eng},
  month        = {04},
  number       = {1},
  pages        = {46--61},
  publisher    = {John Wiley & Sons},
  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},
  volume       = {28},
  year         = {2016},
}