Risk Exposures Outpacing Hedging Programs for Corporates

Published: January 26, 2024

Extensive research of publicly held US corporations provides insight into risk management strategies and trends in the marketplace.

Chatham Financial has published its State of Financial Risk Management Report, an independent study of more than 1,500 U.S. public companies, examining risk exposures, hedging, capital markets activity, and hedge accounting practices.

Selected highlights of the report include:

• Interest rate risk hedging: The rising rate environment in 2022 disproportionately impacted smaller companies with less robust interest rate hedging practices negatively, as the study found that smaller companies are less likely to have an interest rate hedging strategy in place. The industry hedging the lowest proportion is natural resources and mining with 27%.
  
• Foreign currency risk hedging: Exposure to foreign currency risk was recorded as being up year-over-year. While a smaller percentage of companies are exposed to foreign currencies relative to interest rates, a larger percentage of companies with FX exposure are hedging their risk relative to interest rate risk.
  
• Commodities risk hedging: Relative to interest rate and foreign currency, commodity exposure is the least prevalent with 37% of companies in the study being exposed to at least one commodity. This is a 5% increase from the previous year’s findings as commodity prices generally rose over the course of 2022. Larger companies are more than twice as likely to be hedging their commodity exposures.
  
• Newly public companies: The report found that recently public companies (those that filed an S-1 within the last three years) are less likely to have a hedging strategy in place compared to mature companies that have been public for longer than three years. The largest disparity is among hedging FX exposure, as 56% of mature companies with FX exposure are hedging compared to just 32% of recently public companies.

“As noted in the report, 2022 was a year of change, with interest rates rising post-pandemic, and dollar strengthening we haven’t seen in 20 years,” said Amol Dhargalkar, Chairman and Managing Partner at Chatham Financial. “As companies are gaining exposures faster than hedging programs are being implemented, the analysis confirms the idea that most firms intend to let exposures grow until key thresholds are met before considering hedging programs. Our hope with this report is to provide our clients with insights to help them improve their own financial risk management practices, while raising awareness of hedging more broadly in the market.”