January 4, 2011
Vast majority of firms using financial derivatives to hedge risk
The 2010 Fincad Corporate Finance Survey has found that 83 percent 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 percent are now running scenario/sensitivity analysis and 40 percent are calculating value at risk (VaR), Dublin, Ireland- and Vancouver, Canada-based Fincad says.
The results also demonstrate that over 45 percent of corporates need to calculate credit value adjustment (CVA) for their derivatives valuations. This is significantly up from 2009 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," Bob Park, Fincad’s president and CEO, says. "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."
Founded in 1990, FINCAD provides software and services supporting the valuation and risk management of cross-asset class derivatives and fixed income securities to banks, corporate treasuries, asset management firms, auditors, and governments.