Balancing Digital Aspirations While Addressing Risk Management Fundamentals: Observations From Citi Treasury Diagnostics

31 FX RISK MANAGEMENT: TRANSACTION RISK HEDGING TENOR Proportion of Forecasted Exposures Hedged Hedge less than 25% Hedge 26-50% Hedge 51-74% Hedge this tenor Hedge more than 75% 0-3 months 79% 74% 70% 45% 26% 17% 49% 13% 10% 7% 3-6 months 30% 18% 14% 12% 6-12 months 12-24 months 6% 10% 12% 17% 24-36 months 6% 3% 2% 15% Greater than 36 months 6% 2% 1% 8% 17% 18% 16% 19% 35% 35% 70% of those surveyed hedge out to 1-year, whereas only 45% extend the tenor up to two-years. Factors often cited limiting it’s hedging tenor include: Unreliable forecasts — leading to potential hedge accounting concerns, cash flow settlement risk, potential credit charges (CVA — Credit valuation adjustment) and Credit line utilisation. Only 17% hedge longer than 3 years. The hedging ratio is often based on industry specific risk management practices rather than economic, accounting or system related considerations. Three-quarters hedge out to 6-months with a higher percentage hedged in the shorter tenors 0-3 months. The majority hedging more than 75% of their exposures. Only 35% surveyed hedge more than half of its exposures between 6-12 months. The same percentage (35%) hedge less than 50%.