Nearly all corporate CFOs realize that risk management can be an important financial tool. But too few understand how to design appropriate risk management strategies for their firms or appreciate how much value such strategies can create. In a world in which emerging markets play an ever greater role, the importance of a carefully constructed risk management strategy has never been as pressing.
A new report from Citigroup, entitled Creating value by hedging risk in the emerging markets, reveals that a 10% reduction in earnings volatility is associated with a 2.9% increase in market-to-book valuation premium among emerging market firms. Put simply, companies based in the emerging markets, or based elsewhere but with exposure to the emerging markets, can create millions of dollars of additional value just by managing their FX, interest rate and commodity risks better.
The benefits of employing sound hedging programmes don’t stop just there. When a company has a more stable and predictable cashflow it is better able to plan its funding requirements and service its debt more efficiently. This, in turn, could lead to a boost in its credit ratings. In addition, hedging enables companies to manage rising costs without significantly affecting margins.