Why FX Risk Management Is Broken - And What Boards Need to Know to Fix It

42 Pages Posted: 26 Mar 2015 Last revised: 25 Aug 2015

See all articles by Håkan Jankensgård

Håkan Jankensgård

Lund University - Department of Business Administration; Knut Wicksell Centre for Financial Studies

Alf Alviniussen

Independent

Lars Oxelheim

Research Institute of Industrial Economics (IFN); University of Agder; Knut Wicksell Center for Financial Studies, Lund University

Date Written: March 27, 2015

Abstract

In this paper we rethink the role of Foreign Exchange Risk Management (FXRM) in corporate management. We believe it is fair to characterize FXRM, on the whole, as a legacy activity rather than something that reflects a realistic cost-benefit analysis at the enterprise-level. The Board of Directors, as the designated guardians of the interests of shareholders, has a key role in setting the firm on a path towards a cost-efficient and centralized FXRM that preserves the firm’s transparency and predictability towards the investor community. A policy conclusion from our analysis is that responsibility for FX policy should shift from the traditional Finance/Treasury orientation to a group risk function (e.g. a Chief Risk Officer) supported by a risk committee dedicated to integrated risk management.

Keywords: Foreign exchange, risk management, transparency, risk committee

JEL Classification: G30, G32

Suggested Citation

Jankensgård, Håkan and Alviniussen, Alf and Oxelheim, Lars, Why FX Risk Management Is Broken - And What Boards Need to Know to Fix It (March 27, 2015). IFN Working Paper No. 1078, 2015. Available at SSRN: https://ssrn.com/abstract=2584907 or http://dx.doi.org/10.2139/ssrn.2584907

Håkan Jankensgård (Contact Author)

Lund University - Department of Business Administration ( email )

Box 117
SE-221 00 Lund, S-220 07
Sweden

Knut Wicksell Centre for Financial Studies ( email )

Box 7080
Lund, SE-220 07
Sweden

Alf Alviniussen

Independent

No Address Available

Lars Oxelheim

Research Institute of Industrial Economics (IFN) ( email )

P.O. Box 55665
SE-10215 Stockholm
Sweden
+46 8 665 4527 (Phone)
+46 8 665 4599 (Fax)

University of Agder ( email )

Serviceboks 422
N-4604 Kristiansand, VEST AGDER 4604
Norway

Knut Wicksell Center for Financial Studies, Lund University ( email )

P.O.Box 7080
S-220 07 Lund
Sweden
+46462228744 (Phone)

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