Three Approaches to Risk Management — And How and Why Swedish Companies Use Them
11 Pages Posted: 29 Apr 2016
Date Written: Winter 2016
Companies can manage risk by using derivatives or through operational hedging. But there is a third possibility: to leave their operating cash flows unhedged while ensuring that the firm has access to external finance in adverse states of the world. This article reports the findings of a recent survey of over 800 Swedish companies that aims to shed light on the relative importance of these three risk management methods, as well as how they interact in corporate risk management programs. The results show that risk management practices aimed at ensuring access to external finance are the main method used by the largest number of companies, followed by operational hedging methods and financial hedging with derivatives. Large companies hedge using both operational methods and derivatives, whereas small firms are less likely to use derivatives but nevertheless attach great importance to the other two ways of managing risk. Even among the largest companies, operational hedging tends to deemed more important than hedging with derivatives — a finding that, although perhaps a surprise to financial professionals, underscores the authors’ finding that operational and derivative‐based hedges function as complements rather than substitutes. Indeed, the authors report that the most financially sophisticated companies tend to use all three of these common forms of risk management.
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