Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1078: Why FX Risk Management Is Broken – And What Boards Need to Know to Fix It

Håkan Jankensgård (), Alf Alviniussen and Lars Oxelheim ()
Additional contact information
Håkan Jankensgård: Department of Business Administration, Postal: and Knut Wicksell Centre for Financial Studies, Lund University
Alf Alviniussen: European Banking Authority, Postal: London, independent consultant and former Senior Vice President and Group Treasurer Norsk Hydro ASA
Lars Oxelheim: Research Institute of Industrial Economics (IFN), Postal: and Department of Business Administration, Knut Wicksell Centre for Financial Studies, Lund University, Sweden and School of Business and Law, University of Agder, Kristiansand, Norway

Abstract: In this paper we challenge the role of Foreign Exchange Risk Management (FXRM) in corporate management. We believe it is fair to characterize FXRM, on the whole, as a legacy activity rather than something that reflects a realistic cost-benefit analysis at the enterprise-level. The Board of Directors, as the designated guardians of the interests of shareholders, has a key role in setting the firm on a path towards a cost-efficient and centralized FXRM that preserves the firm’s transparency and predictability towards the investor community. A policy conclusion from our analysis is that responsibility for FX policy should shift from the traditional Finance/Treasury orientation to a group risk function (e.g. a Chief Risk Officer) supported by a risk committee dedicated to integrated risk management.

Keywords: Foreign exchange; Risk management; Transparency; Risk committee; Integrated risk management

JEL-codes: G30; G32

41 pages, August 21, 2015

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