Financial risk management practices of New Zealand organisations

Abstract

This thesis examines the financial risk management practices of New Zealand organisations using survey data drawn from 250 respondents. The survey questions were structured around three major topics: risk management governance, foreign exchange (FX) risk management and interest rate risk management. The research explores the governance framework of risk management to investigate factors that influence the hedging approach (active/passive) adopted by entities. Formalised policies for financial risk management, set at a Board/Audit Committee level, are well established in the majority of New Zealand organisations. This suggests that the strategic direction of an entity influences risk management and hedging practices through the setting of policies at a board level. Investigation into the governance framework of risk management also enables insights into the controversial topic of “view based hedging” by the managers of the firm as either seeking to selectively optimise the expected risk return trade-off from using derivatives or alternatively adopting speculative positions. The results show that ‘having a policy’ is strongly associated with hedging characteristics, which suggests that hedging is used to optimise the risk return trade-off. In addition, this survey directly identifies the hedge approach adopted for risk management, which allows for the investigation of hedging characteristics on an active versus passive basis. The results suggest that active managers, relative to passive managers, are more informed and more likely to undertake view based hedging and hedge to longer maturities. With respect to interest rate risk management, there are differences in hedging characteristics across different size groups. Larger entities, relative to smaller entities, are more active in their hedging decisions and hedge to longer maturities. Also, medium and large sized entities are more likely to use FRAs and options. In contrast, no strong associations were found in a FX risk management context. Overall, New Zealand entities across the size spectrum adopt different (similar) characteristics with respect to their risk management of interest rate (FX) exposures.