The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0307-4358.htm

Corporate risk management in Corporate risk

management
Hong Kong and Singapore
Elizabeth Sheedy
Macquarie Applied Finance Centre,
Macquarie University, New South Wales, Australia 89
Abstract
Purpose – To better understand corporate risk management practice in Hong Kong and Singapore.
To explore popular perception that use of derivatives in Hong Kong and Singapore lags that in the
US. To explore possible speculative use of derivatives in these Asian countries.
Design/methodology/approach – A survey of non-financial corporations using the format of the 1998
Wharton study. I investigated the extent to which derivatives are used, how they are used, and methods for
their oversight.
Findings – Derivatives are used more extensively in Hong Kong and Singapore than in the US. They are
particularly popular for managing foreign exchange risk. Their use is more speculative than is common in
the US; that is, market predictions play a significant role in the size and timing of hedge
trades and derivatives are often used for active management of exposures. A lack of controls and
management oversight (such as derivatives policies, regular valuations) is apparent, despite the extent of
derivatives use.
Research limitations/implications – Potential bias may have arisen due to the method used for
recruiting survey respondents. In this study post-graduate students contacted and interviewed company
staff, often based on their personal contacts. In contrast, the Wharton surveys have been mailed to
potential respondents. Students may have been more likely to select companies that traded derivatives.
The sample size (131 firms) is smaller than that of the Wharton studies, but probably sufficient to establish
common trends.
Practical implications – Need to address poor oversight of derivatives trading in order to prevent
further disasters. Need to scrutinise the speculative use of derivatives to ensure that it is value-adding for
firm owners.
Originality/value – To highlight the extent of speculative use of derivatives in Hong Kong and
Singapore. To encourage further scrutiny and controls over the use of derivatives by directors of and
investors in non-financial corporations in these countries.
Keywords Risk management, Derivative markets, South East Asia, Organizations
Paper type Research paper

Introduction
The 2000 Asia risk survey of Asian companies presents a picture of companies that are
ignorant, old-fashioned and uneducated in their use of derivatives[1]. According to the
bankers quoted in that article, Asian corporate risk management executives lag
world’s best practice. This study of 131 firms finds that such a reputation regarding the
use of derivatives is not generally deserved in Hong Kong and Singapore. Contrary to
popular perception, a remarkably large number of non-financial corporations in Hong
Kong and Singapore have adopted derivatives and use them with high intensity. They
are more likely to use foreign exchange and interest rate derivatives of all types,
including option products. While their usage of derivatives exceeds that in many other
Managerial Finance
The author gratefully acknowledges the assistance of students in the Master of Applied Finance Vol. 32 No. 2, 2006
program for surveying corporate treasury staff in Singapore (1999) and Hong Kong (2000). The pp. 89-100
# Emerald Group Publishing Limited
willingness of corporate treasurers to disclose information for this research is also greatly 0307-4358
appreciated. DOI 10.1108/0307435061064188
MF advanced nations, some failures in organisational structures for managing derivative
positions are, however, evident.
32,2 Most published research into corporate risk management practice relates to the
United States and there is a dearth of comprehensive information on the practice of risk
management in Asia. Where surveys in Asia have been conducted they often make the
mistake of including many countries in a single sample, yet Asian countries vary
enormously. This study examines risk management practice in two of the most
90 important financial centres in the Asian region: Hong Kong and Singapore. For the first
time significant samples from each are available for analysis and comparison with
each other as well as with the United States.
This study uses locally based post-graduate finance students to make contact with
target companies and to interview treasury staff. In most respects the survey format[2] is
identical to that used in the 1998 Wharton study in order to make comparisons with US
corporations and thereby identify possible regional differences. References to Asia in this
article relate only to Hong Kong and Singapore. There is no intention on the part of the
author to suggest that corporate risk management practice in Hong Kong and Singapore
is similar to that in other parts of Asia, rather the term Asia or Asian is simply used to
distinguish the firms surveyed in this study from those in the United States and Europe.
Surveys in Singapore were conducted in August-October 1999, while those in Hong Kong
span a slightly later period: April-May 2000. The comparable Wharton survey, while
published in 1998, was actually undertaken between October 1997 and March 1998.
The sample of firms in Hong Kong and Singapore differs from that in the US in
that there are more medium and small-sized firms, and greater representation from
the service sector. These sample characteristics would tend to mitigate against the
widespread use of derivatives in the Asian markets. Despite this, the survey finds that
the proportion of firms using derivatives is actually significantly higher in Hong Kong
and Singapore.
The proportion of firms using derivatives in Hong Kong and Singapore is
consistently high in all the segments considered. Although not reported in Table I,
there is no significant difference in the usage rates between locally based firms and
those that are subsidiaries of foreign firms (78 per cent and 79 per cent respectively).
A likely explanation for the high use of derivatives in Asia is the greater international

Hong Kong and

Singapore
Usage of derivatives USA combined Singapore Hong Kong
Total 50 78** 75 81
Large 83 89 91 86
Medium 45 82** 77 88
Small 12 62** 55 68
Primary 68 94* 100 93
Manufacturing 48 86** 85 81
Services 42 76** 63 58

Notes: Compares the usage of derivatives by firms in Hong Kong and Singapore with usage
by US firms. Shows the percentage of all surveyed firms in each category using derivatives.
Table I. Two-tailed significance tests identify statistically significant differences in the proportion of firms
Percentage of firms using derivatives in each location. *Significantly different from US sample at 5 per cent level.
**
using derivatives Significantly different from US sample at 1 per cent level
orientation of firms in that region with significant foreign-denominated revenues, costs Corporate risk
and debt.
This conclusion contrasts with anecdotal reports that Asian firms are lagging the
management
rest of the world in terms of their use of derivatives. This difference between perception
and reality may result from the sheer size of markets in the USA. While the proportion
of American firms using derivatives is actually relatively low, the large number of
companies trading derivatives in an absolute sense creates a false impression
regarding the relative sophistication of the various regions. Misconceptions may also
91
result from previous studies that examine Asia as a homogenous group of countries;
failing to distinguish those with sophisticated financial sectors from those without[3].
Users of derivatives in Asia are also asked to indicate the type of risk for which
derivatives are used as a management tool. Here Asian risk management practice is
again found to differ significantly from that in the United States (as shown in Table II).
Use of derivatives in Asia is concentrated in foreign exchange risk management. The
proportion of derivatives users employing interest rate derivatives is significantly
lower in Asia than in the United States. However, it should be remembered that since
fewer American firms use derivatives at all, the proportion of all firms using interest
rate derivatives is actually higher in Asia (55 per cent vs 40 per cent in the USA). One
possible explanation for the relative unpopularity of interest rate derivatives relates to
differences in capital structure. If debt finance is less important in Asia than equity
finance, then interest rate risk would accordingly have less impact and managing that
risk a lower priority.
The survey questions firms in some detail on the management of foreign exchange
and interest rate risk as these are the areas of risk managed by most firms. To conserve
space, the results in relation to interest rate risk management are not reported here.
The proportion of firms hedging currency risk with derivatives varies depending on
the nature of the exposure itself as shown in Table III. The exposures most likely to be
hedged are transaction exposures including contractual commitments, anticipated
transactions, repatriations and payments of principal and interest associated with
foreign currency borrowings. The firmer the commitment and the shorter the timeframe,
the more likely it is that a derivative contract will be used for risk management.
Hedging rates are similar in Singapore, Hong Kong and the USA with one
exception: the Asian countries (particularly Hong Kong) are more likely to use
derivatives to manage risk associated with borrowings. It has long been common
practice for Asian firms to borrow in foreign currency to avoid high local borrowing

Percentage of derivatives users Hong Kong and

that use derivatives to manage USA Singapore combined Singapore Hong Kong
*
Foreign exchange risk 76 90 92 89
Interest rate risk 80 70* 66 77
Commodity price risk 54 19** 19 19
Equity risk 17* 13 19

Notes: Compares the type of risk managed by firms using derivatives in Hong Kong and
Singapore with those in the US. Shows the percentage of derivatives-using firms applying risk
management to each type of risk. Two-tailed significance tests identify statistically significant Table II.
differences in proportions in each location. *Significantly different from US sample at 5 per cent Risk management by
level. **Significantly different from US sample at 1 per cent level risk class
MF Proportion of firms who frequently or Hong Kong and Hong
32,2 sometimes use FX derivatives to USA Singapore combined Singapore Kong
Hedge on B/S commitments 87 88 94 80
Hedge off B/S commitments 57 58 65 50
Hedge anticipated transactions <1 yr 83 78 78 78
Hedge anticipated transactions >1 yr 54 48 53 43
Hedge competitive exposure 36 23* 22 25
92 Hedge translation exposure 33 29 25 33
Hedge repatriations 66 58 51 68
Arbitrage rates across currencies 34 51* 45 58

Notes: Compares the types of exposures to which foreign exchange derivatives are applied by
firms in Hong Kong and Singapore with those in the US. Shows the percentage of firms using
Table III. foreign exchange derivatives that apply derivatives to each type of exposure. Two-tailed
Reasons for FX significance tests identify statistically significant differences in proportions in each location.
*
derivatives transactions Significantly different from US sample at 5 per cent level

costs, hedging selectively at times when there is perceived to be a high risk of local
currency depreciation.
The high rate of derivatives use associated with transaction exposures is to be
expected. Since transaction risk is fundamentally related to contractual obligations, it
is generally thought that derivative contracts are an appropriate form of risk
management if hedging is required. It is less apparent, however, that derivatives
contracts are appropriate for hedging competitive exposure and translation exposure.
Not surprisingly these types of exposure are hedged by fewer companies, with Asian
firms particularly unlikely to hedge competitive exposure. While less than one-quarter
of firms in Hong Kong and Singapore hedge competitive risk with derivatives, this
does not necessarily mean that such risks are not managed. Marshall (2000) finds that
Asian multinational firms actually place relatively more emphasis on managing
competitive exposure than those in the USA and the UK. Internal methods are popular
for managing this type of risk such as strategic planning, raising productivity, plant
location, product strategy, promotional strategy, diversification and pricing strategy.
It is often argued that managing accounting exposure is irrelevant and may even
impede the important task of managing the cash flow effects of exchange rate changes
(see Shapiro, 1999, p. 278 for example). Despite this argument, many managers are
concerned to manage translation exposure, presumably because investors and analysts
may misinterpret accounting information and fail to understand underlying economic
realities. However, Marshall (2000) finds that the majority of those firms wishing to
manage translation risk prefer to use internal methods such as netting, matching,
leading and lagging and balance sheet hedging. Thus the low rate of derivatives usage
for translation exposure reported in this survey does not necessarily indicate that the
risk remains unmanaged.
Table IV reports on the hedging intensity of foreign exchange exposures. Results are
shown only for on-balance sheet commitments, as these are the exposures most likely
to be hedged in both Asia and the USA. The evidence presented in Table IV suggests
that for those firms using derivatives, hedging intensity is much greater in Asia than
in the USA. Whereas the median response for US firms was a hedging proportion of
Percentage of firms Hong Kong and Corporate risk
that typically hedge USA Singapore combined Singapore Hong Kong management
0-25 per cent of exposures 42 22*** 14 29
26-50 per cent of exposures 13 24** 27 23
51-75 per cent of exposures 11 23** 18 29
76-100 per cent of exposures 34 31 41 20*

Notes: Compares the intensity of hedging with foreign exchange derivatives by firms in Hong
93
Kong and Singapore with those in the US. Shows the percentage of firms using foreign exchange
derivatives that hedge varying proportions of their on-balance-sheet commitments. Two-tailed Table IV.
significance tests identify statistically significant differences in proportions in each location. Hedging intensity for on
*
Significantly different from Singapore sample at 5 per cent level. **Significantly different from US balance sheet
sample at 5 per cent level. ***Significantly different from US sample at 1 per cent level commitments

26-50 per cent, the median response for firms in Hong Kong and Singapore was 51-75
per cent of the exposure.
While not reported in detail here, the survey examines the original term of
derivative contracts used by responding firms. The results for Asian firms are
generally similar to those of their American counterparts. In both regions contracts
longer than one year are much less common than those of a shorter-term nature. For
example, more than 80 per cent of firms never use contracts longer than three years.
Around 20 per cent of firms say that 76-100 per cent of transactions have an original
maturity of less than 90 days.
While Asian firms tend to use foreign exchange derivatives on a large scale, Table V
suggests that derivatives users are relatively less likely to choose options to manage
risk, especially the more exotic options such as average-rate options, barrier options
and option combinations. It should be noted, however, that since fewer American firms
use derivatives at all, the proportion of all Asian firms using any foreign exchange
options is actually significantly higher (31 per cent vs 22 per cent in the USA).
Table V reports the proportion of firms that use various currency option products,
first as a percentage of those firms that use foreign currency derivatives and then as a
percentage of all firms surveyed. Currency options are relatively less popular than other
derivatives for managing foreign exchange risk in Asia, despite the fact that Asian
firms are more likely to use options in an absolute sense. Firms based in Hong Kong are
a little more likely to use currency options than their Singapore based counterparts, but
the difference is not statistically significant.
The lesser popularity of options (relative to other derivatives) in Asia is
consistent with the tendency to adopt a more active or speculative style of
currency management. The following discussion of Table VI highlights this
feature of risk management practice in Asia. By their nature, options are more
akin to insurance and are more attractive to firms that wish to avoid basing risk
management on a market view.
One of the most marked differences between Asian and US risk management
practice is the role of market views. Asian firms are much more likely to take
active positions or alter the timing/size of a hedge based on market views. The
data are analysed in order to determine whether or not there is a difference in
the role of market views between firms headquartered in Asia and those that are
subsidiaries of foreign firms. Since US firms seem less prone to rely on market
MF Hong Kong and
32,2 Singapore Hong
USA combined Singapore Kong
A. Of those firms that use FX derivatives,
percentage of firms using:
Any FX options 57 46* 41 50
Standard European FX options 37 31 29 33
94 Standard American FX options 20 18 14 21
Average rate FX options 10 2** 2 2
Basket FX options 5 2 2 1
Barrier FX options 12 4* 4 5
Contingent premium FX options 3 4 4 5
FX option combinations 14 4** 4 5
B. Percentage of all firms using:
Any FX options 22 31** 28 36
Standard European FX options 14 21** 19 24
Standard American FX options 8 12 10 15
Average rate FX options 4 2 1 2
Basket FX options 2 1 1 0
Barrier FX options 5 3 3 3
Contingent premium FX options 1 3 3 3
FX option combinations 5 3 3 3

Notes: Compares the usage of foreign exchange options by firms in Hong Kong and Singapore
with those in the USA. Panel A shows the percentage of firms using foreign exchange derivatives
that use foreign exchange options of various types. Panel B shows the percentage of all surveyed
Table V. firms using foreign exchange options of various types. Two-tailed significance tests identify
Foreign exchange statistically significant differences in proportions in each location. *Significantly different from US
options usage sample at 10 level. **Significantly different from US sample at 5 level

views it may be that their subsidiaries located in Asia follow a similar policy. In
fact, when subsidiaries are excluded from the sample there is no significant
difference in the results.
The survey does not provide direct evidence on the reasons for reliance on market
views in Hong Kong and Singapore, leaving this an open question. Is there a perception
that Asian markets are less efficient than those in the USA, thus creating greater
opportunities for active management? Are fewer Asian executives inculcated with the
dogma of efficient markets? Is Chinese business culture more attuned to risk taking?
All these questions remain for research. A more worrying possible explanation relates
to the relatively lax standards for derivatives reporting and evaluation in Asia (see
later section). It is possible that owners are not fully aware of risk management
practices in their firms. Future derivatives disasters in the Asian region along the lines
of Barings and Procter and Gamble may bring increased oversight by directors and
hence more conservative risk management practice.

Management of derivatives activities

Having explored the nature of derivatives use for managing foreign exchange risk, this
section discusses the organisational structures used by firms to manage derivatives.
The issue of management is important since it is often argued that poor oversight has
contributed to some of the widely publicised losses in derivatives markets. This section
Proportion of firms that Hong Kong and Corporate risk
frequently or sometimes Singapore management
allow a market view to USA combined Singapore Hong Kong
****
Alter the timing of a hedge 59 87 80 95**
Alter the size of a hedge 61 82**** 78 85
Actively take positions 32 48*** 55 38*

Notes:
95
Compares the impact of market views on foreign exchange management by firms in Hong Kong
and Singapore with those in the US. Shows the percentage of firms using foreign exchange
derivatives that sometimes or frequently use market views to influence risk management
decisions. Two-tailed significance tests identify statistically significant differences in proportions
in each location. *Significantly different from Singapore sample at 10 per cent level. **Significantly Table VI.
different from Singapore sample at 5 per cent level. ***Significantly different from US sample at 5 Impact of a market view
per cent level. ****Significantly different from US sample at 1 per cent level on FX risk management

will show that in many respects the management of derivatives by Asian companies is
not appropriate for the often speculative style of derivatives use noted earlier.
Effective governance ensures that actions taken by staff and management are in the
interests of the owners of the firm. Sheedy (1999) makes the case that organisational
structure, comprising decision rights, performance benchmarks and reward systems,
must be adjusted to achieve this goal. Smithson (1998) gives more specific guidance on
the oversight of risk management programs for non-financial corporations including a
discussion of policies, including criteria for selecting counterparties and performance
evaluation.
Only those firms that use derivatives are questioned on their management. Table VII
reports the benchmarks applied to evaluate foreign exchange risk management.
Performance targets are considered an essential part of the governance framework. As
determinants of remuneration, sanctions, promotion and status within the firm they
can be powerful drivers of behaviour. Ideally, performance targets should be used to
help align the incentives of owners and employees and thereby reduce agency conflict.
In this context it is disappointing to note that a significant minority of firms have no
benchmark for evaluating their risk management activities.
Of those firms with a benchmark, by far the most popular is the forward rate at the
start of the reporting period. This benchmark has the advantages of being easily
observable, objective and achievable. That is, a treasurer may achieve the performance
benchmark by hedging all exposures at the start of the reporting period. In contrast the
spot rate is arguably not an effective benchmark since it is not a rate at which future
exposures may be hedged. A target that is not achievable may lose its motivational
value.
While spot and forward rates remain popular performance benchmarks, it is not
clear that they are directly connected to broader firm objectives such as earnings per
share (EPS) or return on equity (ROE). As such it is arguable that neither of these
benchmarks are effective in achieving good governance.
Table VIII considers a more important question: how is the benchmark used to
evaluate performance? Is the goal of risk management primarily to reduce risk (ie to
hedge) or to increase profits, or to increase profits on a risk-adjusted basis. Eighteen
percent of firms in Asia simply measure increased profits (reduced costs) relative to the
MF Hong Kong and
32,2 Proportion of responding firms USA Singapore combined Singapore Hong Kong
With no benchmark 44 38 40 36
Of those with a benchmark:
Beginning of period forward rates 42 45 50 40
Beginning of period spot rates 24 34 34 34
Baseline percent hedged strategy 17 19 6 26**
96 Other benchmark 17 6 10 0*

Notes: Compares the benchmarks used by firms in Hong Kong and Singapore for evaluating
foreign exchange risk management with those in the US. First shows the percentage of firms
Table VII. using derivatives that have a benchmark. Then, for those firms having a foreign exchange
Benchmark for management benchmark, shows the proportion of firms using each of the benchmarks specified.
evaluating Two-tailed significance tests identify statistically significant differences in proportions in each
foreign-currency risk location. *Significantly different from Singapore sample at 10 per cent level. **Significantly
management different from Singapore sample at 5 per cent level

benchmark, while a further 22 per cent simply consider absolute profit/loss. In both
cases there is no apparent adjustment for risk. This seems a remarkable oversight
since it is likely that the use of active and selective risk management styles (evidenced
in earlier sections of this paper) may increase risk.
When assessing the value-added by treasury, any increase in profits (reduction in
costs) should be evaluated in the light of any associated change in risk. Unfortunately
only around 20 per cent of firms in Asia and the USA have adopted such a
methodology. One wonders whether the introduction of more rigorous performance
evaluation standards may identify a failure to add value on a risk-adjusted basis. This
may in turn reduce the popularity of active and selective hedging strategies.
The final component of the organisational structure is the management of decision
rights, that is, how are reporting structures and information systems established to
ensure that the interests of owners are protected? The results of analysis are presented
in Table IX which provides evidence of some significant differences in Asian practice

Hong Kong and

Proportion of firms that Singapore Hong
evaluate based on USA combined Singapore Kong
Reduced volatility relative to a benchmark 40 48 56 40
Increased profit (reduced costs)
relative to a benchmark 22 18 15 21
Absolute profit/loss 18 22 25 19
Risk-adjusted performance 21 20 10 31*

Notes: Compares how firms in Hong Kong and Singapore evaluate risk management with those
in the USA. Shows the percentage of firms using derivatives that use each of the specified
evaluation approaches. Two-tailed significance tests identify statistically significant differences in
Table VIII. proportions in each location. *Significantly different from Singapore sample at 1 per cent level.
Evaluation of risk Note that some firms nominated more than one evaluation method so total proportions may
management function exceed 100 in some cases
 Hong Kong and Corporate risk
Singapore Hong management
USA combined Singapore Kong
Proportion of firms having no
documented derivatives policy 21 46** 43 50
Proportion of firms with no regular
reporting of derivatives activity to board 50 44 51 35
Proportion of Firms with no set policy
97
**
on counterparty credit-rating 14 29 31 25
Proportion of firms with no set schedule
for derivatives valuation 19 36** 43 29
Proportion of firms calculating VAR
44 28** 19 40*

Notes: Compares the oversight of risk management by firms in Hong Kong and Singapore with
those in the US. Shows the percentage of firms using derivatives that use each of the specified Table IX.
strategies for oversight. Two-tailed significance tests identify statistically significant differences in Policy, valuation and
proportions in each location. *Significantly different from Singapore sample at 5 per cent level. reporting in relation to
**
Significantly different from US sample at 1 per cent level derivatives

relative to that in the United States. There is, however, very little difference in practice
between firms based in Hong Kong and Singapore.
Asian firms are significantly less likely to have a documented derivatives policy,
less likely to have a policy on the credit-worthiness of counterparties, less likely
regularly to value their portfolios of derivatives and less likely to calculate value-at-risk
(VAR). When subsidiaries of foreign firms are excluded from the sample the results are
not significantly different. All these results indicate that oversight of derivatives is not
as effective in Asian firms, whether locally or foreign owned.
Seventy-one per cent of firms in Hong Kong and Singapore insist that
counterparties meet minimum creditworthiness standards as measured by a credit
rating. Where such a credit policy exists, the vast majority require either AA or A
ratings. For maturities greater than twelve months a number of firms enforce stricter
guidelines, typically requiring a AA rating. In comparison, the 1998 Wharton study
finds that US firms, while more likely to impose credit requirements, are satisfied with
generally lower credit ratings.
As noted earlier in this paper, Asian firms commonly adopt an active or selective
hedging style. It is therefore surprising that Asian firms are relatively lax in their
valuation of derivatives and sparing in the use of techniques such as VAR. Less than
two-thirds of Asian firms have a regular schedule for portfolio valuation. Where firms
do regularly value derivatives, the frequency of those who do so at least monthly is
50 per cent (similar to the frequency in the United States). However, when undertaking
valuations 52 per cent rely primarily on the original dealer (compared with only 38 per
cent in USA). From a management perspective this style of valuation is arguably less
effective as the original dealer may have a vested interest in misrepresenting the true
value. Only 23 per cent rely primarily on in-house sources for valuations (43 per cent in
USA) and 25 per cent use another source (26 per cent in USA) such as an independent
consultant.
The Asian results suggest weakness in derivatives oversight compared to the
United States, but it could be argued that this comparison is unduly harsh since the US
MF has the most rigorous reporting requirements. What about standards elsewhere, such
32,2 as in Europe? Surprisingly, Bodnar and Gebhardt (1998) find that German firms are
even stricter than those in the USA in their policies for oversight of derivatives.
German firms are even more likely than their American counterparts to have a set and
frequent schedule of reporting to the board and they are more likely to value their
portfolios frequently. Therefore firms in Hong Kong and Singapore seem to fall below
world’s best practice in this regard.
98 Further analysis concentrates on those firms that use active and selective hedging
strategies. For such firms adequate oversight is an even greater imperative, but
disappointingly the results do not reflect this. Of those firms that sometimes or
frequently change the timing of foreign exchange hedges based on market views only
44 per cent have a documented derivatives policy, 43 per cent have no regular schedule
for reporting derivatives activity to directors and 38 per cent do not value their
derivatives regularly. Of those firms that sometimes or frequently actively manage
foreign exchange exposures, 50 per cent have no documented derivatives policy, 50 per
cent do not regularly report their activities to directors and 38 per cent do not value
their derivatives regularly. These figures indicate that the oversight of derivatives in
firms with the most speculative risk management styles is no better than that in other
Asian firms.

Conclusions
The study considers the following questions:
(1) How does risk management practice vary between Hong Kong and Singapore?
(2) How and why does Asian risk management practice (as represented by Hong
Kong and Singapore) differ from that in the United States?
(3) How could the oversight of risk management in Hong Kong and Singapore be
improved?
The study finds very little difference in risk management practice between Hong Kong
and Singapore. Despite some differences in government policy between the two
countries it would appear that risk management practice for non-financial
corporations is similar in almost every respect.
In many respects risk management in Hong Kong and Singapore is quite similar to
that in the United States. The most notable difference is the extraordinarily high
penetration of derivatives in the Asian firms relative to the US, especially among small
and medium-sized firms. Not only do a higher proportion of the Asian firms surveyed
use derivatives, but their intensity of use also exceeds that in the USA. Derivatives for
managing foreign exchange risk are particularly popular, probably reflecting the
importance of exports and imports for firms in Hong Kong and Singapore, as well as
the popularity of offshore borrowing. Interest rate derivatives are widely used but
non-financial corporations in these centres are less likely to use derivatives for
managing commodity and equity price risk.
Hong Kong and Singaporean firms are also more likely to use option products than
those in the United States, but among derivatives users, forwards are generally
preferred. This finding may be related to the significantly greater role of market views
in managing risk. Firms included in this survey are much more likely to selectively
hedge or actively manage their exposures.
 A further difference is noted in the oversight of derivatives transactions. Asian Corporate risk
firms are less rigorous in their policies relating to derivatives and the reporting of and management
valuation of derivatives. This is true even for those firms employing more speculative
risk management styles. Such a finding is worrying given the popularity of this
approach.
The crucial role of market forecasts in risk management practice in Hong Kong
and Singapore is notable. The study also shows that corporations are generally 99
not applying risk-adjusted performance measures to evaluate their risk management
strategies. This shortcoming in the oversight of risk management is signficant
because in finance generally the need for an appropriate risk/reward trade-off is
acknowledged.
One wonders whether these latter two points are connected. If more rigorous
performance evaluation and reporting standards are introduced, they may show that
active and selective hedging programs based on market views are not adding value on
a risk-adjusted basis. Such a finding would be expected to reduce their popularity and
stimulate the use of option strategies relative to forward contracts.
For practitioners the major lessons arising from this research relate to the oversight
of risk management programs. Use of derivatives in Hong Kong and Singapore is more
widespread and intense that in the US, and the style of use is considerably more
speculative. Therefore the potential for disasters of the type experienced by Barings,
Procter and Gamble, Metallgesellschaft and others is clearly present. Appropriate
organisational structure is needed to help prevent such occurrences, including risk-
adjusted performance measurement, clear policies for the use and management of
derivatives, regular valuation of portfolios, carefully structured remuneration
packages as well as checks and balances within the firm.

Notes
1. See, for example, Leander (2000).
2. A copy of the survey questionnaire is printed in Bodnar et al. (1998). For the Hong Kong
and Singapore surveys one additional question was included asking firms to indicate
their ownership status as either publicly listed in the country in which the survey was
undertaken, subsidiary of an overseas listed company, privately owned, government
owned or other.
3. Leander (2000) and Marshall (2000) may fall into this trap. Leander includes firms from
the majority of Asian countries in her survey, including Australia but excluding Japan.

References
Bodnar, G. and Gebhardt, G. (1998), Derivatives Usage in Risk Management by US and German
Non-financial Firms: A Comparative Survey, National Bureau of Economic Research.
Bodnar, G., Hayt, G. and Marston, R. (1998), ‘‘1998 Wharton survey of financial risk management
by US non-financial firms’’, Financial Management, Vol. 27 No. 4, pp. 70-91.
Leander, E. (2000), ‘‘Time to act on good intentions’’, Asia Risk, pp. 12-16.
Marshall, A. (2000), ‘‘Foreign exchange risk management in UK, USA and Asia Pacific
multinational companies’’, Journal of Multinational Financial Management, Vol. 10,
pp. 185-211.
Shapiro, A. (1999), Multinational Financial Management, John Wiley and Sons, New York, NY.
MF Sheedy, E. (1999), ‘‘Agency risk: the forgotten element in financial risk management’’, Economic
Papers, December, pp. 80-91.
32,2 Smithson, C. (1998), ‘‘Implementing a risk management program’’, Managing Financial Risk,
Irwin, 3rd ed., Chapter 23.

About the author

Elizabeth Sheedy is based at the Macquarie Applied Finance Centre where she teaches financial
100 Risk Management to students in the Master of Applied Finance program. From 1982-1993 she
worked in industry, filling roles in corporate treasury and investment banking. Her research and
teaching interests include corporate risk management, modelling financial risk and agency risk.
Elizabeth Sheedy can be contacted at: esheedy@mafc.mq.edu.au

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com

Or visit our web site for further details: www.emeraldinsight.com/reprints