Corporate Foreign Exchange Risk Management

Chapter 8Integrated Risk Management

One of the most important trends in corporate risk management is the rise of integrated approaches to managing risk, such as the increasingly popular enterprise risk management (ERM). Centralizing FXRM is not enough for integrated risk management (IRM) to happen, however. It is quite possible to have a fully centralized control over FX transactions and FX policy yet still qualify as the opposite of IRM: ‘silo‐based’ risk management. Silos refer to risk management activities carried out independently of other efforts to manage risk in the firm.

In fact, FXRM is often viewed as a classic risk management silo. Historically, it has been the domain of the treasury department, whose recommendations have tended to be merely ‘rubber‐stamped’ by the board of directors. In some firms, there are even silos within the FX silo. These are cases where treasury's efforts to manage various facets of FXRM are fragmented rather than coordinated.

Adopting IRM has important implications for FXRM. IRM, in many ways, challenges the traditional role of the treasury and its handling of FXRM within the company. Proponents of IRM tend to view the firm's board of directors, the supposed guardians of the best interest of shareholders, as the ultimate ‘owner’ of the firm's risk profile. The board does not run the firm on a day‐to‐day basis, however, so a body analysing risk management decisions on their behalf is needed to implement IRM. The so‐called risk committee ...