Enterprise Risk Management, 2nd Edition

CHAPTER 32Foreign Exchange Risk Management

 

LARS OXELHEIM, PhD

Professor of International Business and Finance at the School of Business and Law, University of Agder, Norway, Research Institute of Industrial Economics (IFN), Stockholm, Sweden, and Professor emeritus at Lund University, Sweden

 

ALF ALVINIUSSEN

Former Senior Vice President in Corporate Finance, Norsk Hydro ASA, Oslo, Norway

 

HÅKAN JANKENSGÅRD, PhD

Associate Professor in Corporate Finance, Lund University

 

INTRODUCTION

One of the main ambitions of enterprise risk management (ERM) is to reduce the impact of silos on risk management decisions. In the context of foreign exchange risk management (FXRM), there is a clear potential for silo effects because many business units prefer to manage their own foreign exchange (FX) risk if given a choice. Doing so allows them to protect their operating margins and performance targets according to their own preferences. Recognizing that this can lead to poor coordination, and a suboptimal outcome for the firm as a whole, many firms attempt to centralize FXRM. Centralization of exposure management yields several benefits that we will discuss in this chapter.

Our central message, however, is that centralization is not the same thing as integrated risk management. The reason is that corporate functions can also act in a silo fashion even when the exposure management has been fully centralized. Experience shows that treasury, the function usually entrusted with FXRM policy, ...