In recent months, countless revelations surrounding the extensive intelligence gathering work of the National Security Agency have swirled about. Accessing email messages, phone records, online data, and direct wiretaps, the NSA has compiled mountains of data on persons of interest, including many who pose no discernible threat to the physical security of the United States. Among the allegations:
Words with friends: We’ve shared some tense words with world leaders in recent weeks, including our friends and allies, ever since it’s come out that we’ve been spying on more than thirty of them. Though her official calls happen on a hyper-encrypted Bundesrepublik phone, German Chancellor Angela Merkel’s personal cellphone was monitored for the better part of a decade, prompting her call to President Obama to complain. U.S. ambassadors to France and Spain received summons to Paris and Madrid to answer for our surveillance activity, while Mexico’s and Brazil’s presidents expressed their displeasure at having their email being read. At this point we have to ask – how humiliating would it be to be a nation’s leader and not have been considered worthy of NSA monitoring?
Shining light into the cloud: Users of Google and Yahoo email and document services housed within those organizations’ data centers might have thought their mail and spreadsheets were safe from prying eyes. But the NSA has been shining light into the cloud – in fact, a leaked internal agency presentation on Google Cloud Exploitation showed how to compromise its security, and even had the audacity to show a smiley face emoticon with an arrow pointing to the specific point of vulnerability! Perhaps the next Google or Yahoo press conference will begin with Mick Jagger’s voice blaring over the loudspeakers: “Hey you, get off of my cloud!”
Predicting the Pope: The Italian weekly Panorama claimed last week that the NSA tapped 46 million Italian phone calls in the period leading up to the selection of Pope Francis. It stated that while many bishops and cardinals resided in Rome in the days leading up to the conclave, the intelligence community was busy monitoring their calls for any leads on who might be next in line to the papacy. It’s been a long time since Joseph Stalin derisively asked, “How many divisions does the pope have?” However, if Panorama’s allegations are true, perhaps the NSA has more recently come to a different assessment of the national security threat level emanating from the Vatican?
At this point, you may be wondering – does Chatham have some confession to make about unbridled surveillance of corporate hedging activities? Absolutely not! We are pleased to report that Chatham has never tapped any phones, hacked any email accounts, set up fake internet cafes to steal login credentials, shined a searchlight into someone else’s cloud, or even tried to predict the next pope. However, we can say that we have compiled comprehensive data and valuable insights on the hedging practices of more than 1,000 U.S. companies, all gleaned from their publicly available filings. The result of our research is a quantitative benchmarking report on The State of Financial Risk Management, delving into how these companies address interest rate, currency, and commodity hedging and hedge accounting. A few of the highlights:
Hedging usage by asset class: Fully 89% of analyzed companies reported interest rate risk, either in the form of present interest expense, future forecasted debt, or interest-bearing assets on the balance sheet. Yet only 41% of these companies currently manage that risk with interest rate hedges, doubtless at least partially a consequence of the exceptionally low rate environment at present. By contrast, currency exposures show up for more than three-quarters of companies studied, but more than half employ currency hedges to protect against fluctuation in their exposures; volatility across currency pairs persists whether interest rates are high or low.
Hedge accounting usage by asset class: More than 80% of FX cash flow hedgers take advantage of hedge accounting treatment to prevent income statement timing mismatches between derivatives gains or losses and revenue or expense recognition. On the other hand, fewer than 60% of commodity hedgers use hedge accounting, perhaps because of the complexity inherent in applying hedge accounting correctly.
Hedging usage by company profile: There are numerous interesting insights to be gained from corporate hedging practices by size (revenue) or industry. Larger companies are unsurprisingly more likely to hedge currency cash flow and balance sheet risk, and to apply currency hedge accounting. In the commodity space, however, industry is much more likely to influence a company’s approach to risk management – certain industries like beverages demonstrate pervasive hedging because their underlying exposures to fuel and ingredients can be hedged, and changes in commodity prices aren’t generally passed along to consumers. In contrast, specialty chemicals companies practice limited commodity hedging because even though changes in chemical inputs dramatically impact profitability, no financial market exists to hedge away the exposures.
There are myriad insights to be gained from studying the practices of other leading companies, even in a non-clandestine fashion! If you’d like to understand how more than one thousand public companies handle the critical issues of hedging and hedge accounting, please download our full report. And if you have any other hedging questions, don’t hesitate to give us a call at 610.925.3120 or email us (and potentially also give a bored NSA employee something interesting to which to listen!)