A Survey On Risk Management

A Survey on Risk Management
and Usage of Derivatives by

Non-Financial Italian Firms
7/08
Electronic copy available at: http://ssrn.com/abstract=1305033
A Survey on Risk Management
and Usage of Derivatives by
Non-Financial Italian Firms
by Gordon M. Bodnar
Costanza Consolandi
Giampaolo Gabbi
Ameeta Jaiswal-Dale
n. 7/08
Milan, July 2008
Copyright
Carefin, Università Bocconi

INDEX
Abstract
1. INTRODUCTION 1
2. A REVIEW OF PREVIOUS SURVEYS 2
3. SURVEY METHODOLOGY AND SAMPLE 11
4. DERIVATIVES OR INSURANCE INSTRUMENTS’ USAGE AND

USAGE INTENSITY BY 1999 13
5. DERIVATIVES USAGE CONDITIONAL ON SIZE AND ACTIVITY 16
6. EXPECTED BENEFITS FROM RISK MANAGEMENT ACTIVITY 18
7. CONCERNS ABOUT DERIVATIVES USAGE 20
8. THE RISK MANAGEMENT ACTIVITY IS BEEN INFLUENCED

BY IAS NEW ACCOUNTING RULES? 22
9. INTEREST RATE RISK MANAGEMENT 31
10. ENERGY AND COMMODITY DERIVATIVES USAGE 32
11. OPERATIONAL RISK MANAGEMENT 34
12. CONCLUSIONS 36
References 38
ANNEX 1 – PREVIOUS SURVEYS 39

ANNEX 2 – SURVEY OF RISK MANAGEMENT BY
ITALIAN NON-FINANCIAL FIRMS 41
CAREFIN WORKING PAPER I

Abstract
This paper presents a survey on the risk management function and the usage of hedging
instruments by Italian non-financial firms. The objective is to measure how firms manage the
following risks: Exchange-foreign, Interest rate, Energetic, Commodity, Equity, Counter-party,
Operational, Country. The study aims at providing descriptive evidence with respect to several
questions that are raised in the literature and that are finalized to find out if the firms hedge their
exposure or potential exposure, which particular financial risks are managed, how widespread is
the derivatives usage, the choice of which derivatives are used for which purposes, the risk
management policy implementation, the performance measurement and reporting structure.
In Italy accurate disclosure of derivatives usage in financial statements does virtually not
exist. As a result, relatively little is known about the patterns of use and of firm’s attitudes and
policies with respect to derivative use. To fill the information gap, this survey documents the
usage of derivatives by non-financial large companies.
The outcomes of the survey, conducted both for listed and non-listed firms, suggest that
Italian firms are less likely to use derivatives than US firms. The percentage of firms using
derivatives or insurance instruments has not changed noticeably since 1999 (the beginning of the
euro period). The use of derivatives is more significant among large firms in every risk typology
and, in the area of commodity and equity risk management, large firms are the unique size group
that uses these instruments in its management activity. The fact that large firms are more likely to
use derivatives is suggestive of an economies-to-scale argument for derivatives use.
According to Italian risk managers the low intensity in derivative use cannot be explained by
(i) concerns about external perception of derivative/insurance use; (ii) costs of risk management
greater than benefits; (iii) expected price to move in firm’s favour; (iv) shareholders expectations
to manage risk; (v) uncertainty of timing and/or size.
The reasons to explain the limited practice in derivative markets are as follows:
1. Insufficient exposure to risk area to warrant management;

2. Exposure more effectively managed by other means:
3. Difficulties in monitoring/measuring contract effectiveness.
CAREFIN WORKING PAPER II

1.
INTRODUCTION
Financial risks management is a composite activity. Some players managed risks by very
conventional operations but very often this is not a tractable and financially feasible solution.
More sophisticated tools are derivatives, able to reduce the total risk in the system (Smith, 1995),
or transferring to economic agents that are prepared to bear these risks.
As to the reasons why firms should or should not hedge, the discussion is still going on and
most depends on firm’s risk appetite, but on the consciousness as well.
Fenn et al. (1997) and Smith (1995) provide a comprehensive overview of the valid reasons
to hedge and their analysis among the US firms. Géczy et al. (1997) and Nance et al. (1993)
argued in their study that the traditional arguments by Smith and Stulz (1985) to motivate
hedging (such as managerial risk aversion, the expected costs of financial distress or concavity in
firm value due to convexity in tax liabilities) are necessary but by no means sufficient conditions.
According to many researchers, one factor that justifies the hedging activity is represented by
the capital market imperfections even if many others issues also affect the company’s decision on
the derivatives usage (such as the presence of a sufficiently large risk exposure and costs of
implementing).
We can see from the literature a number of valid reasons why firms should hedge (for
example, this activity has the purpose to maximize shareholder value).
Quantitative information about corporate derivatives usage, however, can be obtained either
from surveys or from financial statement but especially in the European continent the information
that financial statements provide is often extremely limited in the scope. A notable exception, as
presented above, is provided by Bodnar and Gebhardt (1998) who provide a comparative
evidence among German and US firms.
In Italy, moreover, accurate disclosure of derivatives usage in financial statements does
virtually not exist. As a result, relatively little is known about the patterns of use and of firm’s
attitudes and policies with respect to derivative use.
To fill the existing gap, this survey documents the use of derivatives by non-financial large
firms operating in Italy.
The study aims at providing descriptive evidence with respect to several questions that are
raised in the literature and that are finalized to find out if the firms hedge their exposure or
potential exposure, which particular financial risks are managed, how widespread is the
derivatives usage, the choice of which derivatives are used for which purposes, the risk
management policy implementation, the performance measurement and reporting structure.
CAREFIN WORKING PAPER 1

2.
A REVIEW OF PREVIOUS SURVEYS
In the last three decades, a number of studies examined risk management practices, focusing
on management behaviour in presence of a potential risk and showing a detailed explanation
about the financial instruments adopted in management activity.
Some studies described the use of derivatives by non-financial firms [see Hakkarainen et al.,
(1997); Berkman and Bradbury (1996); Judge (1995); Alkebäck and Hagelin (1996); Bodnar and
Gebhardt (1997); Bodnar et al. (1998); Pramborg (2000); El-Masry (2001)], yet, another group of
researchers investigated the determinants of corporate hedging policies by financial firms [Fatemi
and Fooladi (2005)] or by public companies listed [Berkman et al. (1996)]. Some studies, finally,
analysed both financial and non-financial firms, listed and not listed [see Block and Gallagher
(1986); Dolde (1993); Anand and Kaushik (2004); Servaes and Tufano (2005)]1.
Block and Gallagher (1986) examined the corporate use of derivatives in interest rate
exposure hedging activity in United States, after in October of 1979 the Federal Reserve had
changed its policy, increasing the interest rates volatility, creating an incentive for hedging
activity of interest rate exposure. Other incentives for hedging included the predominance of
floating rates on the short-term side of the credit markets and the ever-increasing debt burden of
U.S. corporations. In spite of these factors, the use of hedging through interest rate futures and
options resulted in a relatively immature state.
They used questionnaires to gather data from all Fortune 500 companies, receiving answers
from 193 of them, with a rate of response of 38,6%. Results showed that approximately one out
of five firms used interest rate futures and options to hedge the interest rate exposure, with a
higher usage degree by larger firms and firms in traditionally commodity-oriented industries. The
two most frequently used hedging instruments were Treasury bill futures and Eurodollar futures.
Interest rate futures seemed to enjoy a greater popularity than interest rate options. Among the
respondents, futures were perceived as being advantageous in terms of cost and efficiency in
hedging and options were seen as providing less risk exposure and fewer administrative
problems.
Out of the 193 respondents to the survey, approximately eighty percent were currently non-
users of interest rate futures and options. The primary reasons given for non-utilization were top
management resistance, lack of knowledge, restriction on upside potential, the expense involved
and legal and accounting obstacles.
The survey conducted by Dolde (1993) on Fortune 500 companies (244 of which completed
the questionnaire, with a 48,8% response rate)2 reported that large companies diverged greatly in
the scope and sophistication of their approach to risk management, despite bigger firms could
1 See Annex 1.
2 The main differences between Dolde (1993) and Block and Gallagher (1986) questionnaires were represented by the parameters
utilized by Dolde in defining his own survey. In fact, the researcher studied not only corporate activity in interest rate risk
management but the foreign rate risk hedging activity, too. Furthermore, Dolde reported information about the use of swaps, futures,
forwards and options.

profit of a greater portfolio diversification, making the risk exposure less urgent. Small
companies reputed the costs of management of financial risks as a negative voice of their budget,
ignoring the benefits that could come down from such activity. Another important explanatory
variable of the risk management approach was found in the view of market directions by the
treasurer.
Of the 244 Fortune 500 companies that responded to the survey, over 85% reported swaps,
forwards, futures, or options in managing financial risk.
Hakkarainen et al. (1997) exhibited the results of a survey conducted in 1994 on interest rate
risk management in the top 100 largest Finnish non-financial firms3. The data for this study
consisted of answers to a questionnaire and financial statement data. The questionnaire was
mailed in 1994 to 100 firms4, 84 participated. The Finnish survey found that most common
features in the interest rate risk management approach were avoidance of risks and
minimisation/maximization of interest expenses/income, revealing risk aversion to be the
prevailing attitude in most firms. A very interesting finding was that over 40% of the responding
firms had not made an effort to estimate the interest rate exposure of any item. However, the
evidence suggested that large firms employ duration and gap analyses more frequently than small
firms.
Regarding hedging instruments, the answers show that, first of all, Finnish firms used the
Interest Rate Swap (IRS), the second common instrument was the Forward Rate Agreement
(FRA), and third, the Over The Counter (OTC) options.
Berkman and Bradbury (1996) presented an empirical study on the determinants of corporate
use financial derivatives in New Zealand5, extending previous research findings by including
other explanatory variables that they expected to influence the corporate hedging decision.
Specifically, they tested the managerial risk-aversion hypothesis, the relation between the use of
derivatives and the level of foreign activities and the need to coordinate investing and financing
policies. The authors sampled all firms listed on the New Zealand stock Exchange excluding
foreign firms6 and firms in the financial services sector. Of the remaining 116, 55 firms (48%)
held financial instruments at balance date. None of the firms in the sample indicate that derivative
financial instruments were used for speculative purposes. According to risk management theory,
data showed that corporate derivative use increase with leverage, size, the existence of tax losses,
the proportion of share held by directors, and the payout ratio, and decrease with interest
coverage and liquidity.
3 Finnish firms have been faced with greatly fluctuations interest rates since the deregulations of the money market bean in the latter
half of the 1980s. due to efforts to curb domestic demand and support the external value of the money, money interest rate were high
around the turn of the decade. After the flotation of the money, interest rates fell substantially. Long-term interest rates rose in 1994
as a result of the world-wide bond rally while there was a downward trend in short-term rates, owing to low inflation and ample
money market liquidity resulting from efforts of the central bank to stimulate growth.
4 The authors considered like discriminatory factor the turnover value of 1992.
5Also in New Zealand the use of financial derivatives has grown dramatically since the deregulation of New Zealand financial
markets in 1984. Over the period June 1987 to June 1994, the notional amount of swaps held by financial institutions increased from
$2,350 million to $39,710 million; options and futures increased from $6,436million to $29,106 million; and forward contracts
increased from $53,710 million to $143,076 million.
6 Because they were not subject to the same financial disclosure rules as local firms.

The study by Judge (1995) introduces a different way to define hedging: it recognised that
firms can manage their risks in several ways and therefore firms that did not use derivatives
might hedge through alternative means.
Like other previous studies, this paper empirically investigated the determinants of corporate
hedging using a sample of large firms. The sample was selected from the 1995 FTSE500 which
listed the 500 largest UK companies quoted on the London Stock Exchange, ranking a company
by its market capitalisation. The sample was restricted to non-financial firms7, so that the final
sample consisted of 441 non-financial firms.
Results showed that 78% of the 186 societies exhaustively completing the questionnaire
revealed to use derivatives as a tool of risk coverage, while the figure inferred by the annual
report was slightly lower (67%).
Besides, from the data we can deduce that, mainly, the implicit assumption is that derivatives
were used for hedging rather than speculation and that the great enterprises used more commonly
these products than small enterprises.
Jalilvand (1999) and Jalilvand and Switzer (2000) analysed the outcomes of a survey
conducted in 1996 on a sample of Canadian listed non-financial companies. Jalilvand (1999)
showed that scale, operational efficiency, and the level of the integration of treasury activities are
important determinants for identifying Canadian and international users of derivatives. The
maturity debt was also longer for users of derivatives, suggesting that derivatives may be used to
reduce the adverse effect of wealth transfers from shareholders and bondholders. The author
found no evidence that managerial risk aversion and ownership concentration influence corporate
use of derivatives in Canada.
From the comparison between the Canadian, American and New Zealand societies, the author
underlined that all of them were governed by similar influences and that they differed only in the
role that every of them attributed to the alternatives forms of coverage, as the liquidity, the
dividend payout and the use of different debt instruments.
Jalilvand and Switzer (2000) provided evidence of important similarities and differences in
derivatives usage between Canadian, U.S, and European risk managers8, revealing that the use of
derivatives products was more widespread in Canada than in United States and Continental
Europe. Most firms were found to have written risk management policies, but did not benchmark
their treasury performance. Moreover, Canadian risk managers were less inclined than their
European and American counterparts to take positions based on their views on the market.
Berkman et al. (1997) describe derivatives usage of a sample of New Zealand (NZ) firms9
compared with the results of previous US surveys10. The main issue the authors addressed was
7 Firms from the financial services sector were excluded from the sample because their risk management activities include both
hedging and speculative transactions.
8 See Bodnar, Hayt, Marston and Smithson (1995), Downie, McMillan, and Nosal (1995), Bodnar, Hayt, and Marston (1996), Dolde
(1993).
9 They sent questionnaires to 124 public companies listed on the New Zealand Stock Exchange (NZSE) and received a total of 79
useable responses, which represents a response rate of 63.7%.
10 The comparison was done with recent surveys by Bodnar, Hayt, and Marston (1996); Bodnar, Hayt, Marston and Smithson
(1995); and Phillips (1995) presented descriptive evidence on the use of derivatives by US non-financial firms.

whether derivatives use is a phenomenon primarily limited to the sophisticated and liquid US
financial markets. The focus on a small economy such as NZ provides an interesting perspective.
The objectives of financial risk management are very similar for both NZ and the US.
In the same way, the data showed, surprisingly, that New Zealand companies used more
frequently and in greater measure the derivatives contracts in comparison to the American
enterprises: 53.1%, of respondents affirmed that they used derivatives. This result compared to
26.5% (1995) and 17.5% (1996) of the respondents in the US surveys underline with evidence
the conclusions of the authors.
The data showed that in NZ, 100% of the firms with market value of equity greater than $250
million used derivatives, compared to 65% in the US. Of the firms with market value lower than
$50 million. 36% of NZ firms used derivatives, compared lo 12% of US firms. The survey
showed, finally, that the most used financial tools, mainly to hedge foreign and interest rate risks,
and largely from the great enterprises, were the Forward Rate Agreement followed by the Interest
Rate Swaps.
Alkebäck and Niclas (1999) provided survey evidence on the use of derivatives among
Swedish non-financial Firms11. The results were directly compared with those presented in
Bodnar et al. (1995, 1996), without controlling for differences in size and industry classification.
The Swedish survey found that lack of knowledge about derivatives within the firm is the main
concern for Swedish corporations.
The questionnaire12 was mailed to the financial directors of all non-financial firms listed on
the Stockholm Stock Exchange. The 213 usable responses have given the survey a reasonable
76,53% response rate13.
In accordance with Bodnar et al. (1995, 1996) and Berkman et al. (1997) they found that
firms’ derivative hedging activity was primarily concentrated in foreign exchange and interest
rate exposure. In addition, swaps were the most commonly used instruments for interest rate
exposure, whereas swaps, futures and OTC forwards were the dominating instruments for foreign
exchange exposure. The frequent use of futures to manage foreign exchange exposure was in
contrast with Bodnar et al. (1995, 1996) and in particular Berkman et al. (1997).
Loderer and Pichler (2000) surveyed the currency risk management practices of Swiss
industrial corporations. The aim of their research was twofold: first, to examine if the non-
financial societies quantified their risk profile and, second, to analyze if and how they managed
the currency risk that, again, would have been able to threaten their economy14.
11 “Although derivatives have a long history, the past two decades have witnessed a substantial increase in the variety and
complexity of derivatives. The vast number of derivatives available has increased the possibility for firms to reduce their financial
exposure. However the same instruments have also increased the possibility for risk taking by firms. Thus, the task of overseeing
financial activities within firms has become more complicated. Consequently, knowledge about firms’ derivative practices has
increased in importance to shareholders, creditors, regulators, and other interested parties.” in Per Alkebäck and Niclas Hagelin,
1999. This study was undertaken in response to this problem.
12 It was very concise consisting in 13 questions.
13 The response rate was ampler than the American studies (26.5% in 1995 and 17.5% in 1996) but in line with that New Zealand
(63.7% in 1997).
14 The leitmotiv of their investigation is to seek in a recent past: “Between 1978 and 1996, the Swiss franc experienced dramatic
swings in relation to major currencies such as the U.S. dollar, the Italian lira , and the British pound. Comparing highest and lowest

The questionnaire was sent to all 165 firms listed in the Zurich Stock Exchange (ZSE) in
1996 except for banks and insurance companies. For comparison purposes, the same survey was
sent to 165 non-traded firms randomly selected from the 1994 and 199515. The main conclusion
of Loderer and Pichler was that industrial firms did not have the abilities to define the risk of the
value’s profile of their company.
De Ceuster et al. (2000) sent a questionnaire to 334 large corporations operating in Belgium.
This population consisted of 221 Coordination Centres and 123 largest firms ranked by
turnover16. The global response rate was 21.9% that was in line with the previous analysis.
The data shows that 65.7% of the 73 respondents reported that they used derivatives, 22%
never used them and 12.3% gave up using them. The authors, besides, tried to determine the
reasons why some of them did not use these financial tools or had stopped doing it. The results
showed that 50% of non-users considered like principal motivation the policy restrictions
imposed upon the treasurers by the board of directors. Other often-cited reasons are the risk of
the products, the significance of the exposure and the existence of other hedging alternatives.
When the authors asked about their intentions of using derivatives in the futures, only one fifth of
non-user said that they were willing to consider derivatives for hedging purposes in the futures.
This study, also, reported data on large typologies of covered risks (interest rate and
commodity risk) and the principal derivatives instruments used by companies (Forwards Rate
Agreement followed by Interest Rate Swaps, by options OTC and, finally, by structured
contracts).
Bodnar and Gebhardt (1999) provided comparative evidence of German vis-à-vis US firms.
The questionnaire was mailed to 368 firms and 126 of them answered (whit an answers rate
34.24%)17. Bodnar and Gebhardt limited their analysis to three typologies of derivatives
instruments, to hedge foreign exchange, interest rate and commodity price risk.
Results showed that German firms are more likely to use derivatives than US firms, with 78
percent of German firms using derivatives compared to 57 percent of US firms.
As pointed up by Bodnar and Gebhardt, the explanation of this substantial difference lies in
the politics of control and monitoring that were substantially more urgent for German enterprises
in comparison to the most permissive Americans rules18.
exchange rate levels, the U.S. dollar depreciated by 60% vis à vis the Swiss franc, the Italian lira by 70%, and the British pound by
62%. Moreover, although not as high as those observed in the equity markets, annual currency rate volatility of the U.S. dollar, e.g.,
has exceeded 12%.” in Loderer and Pichler, 2000.
15 The results show a greater adhesion from listed companies with a 36.36% answer rate in opposition to the 21.82% of the not
rated, but, in average, they conducted to 29.09% answer rate, in line with the previous investigations.
16 Also in this study the turnover was used as a selection criterion, and were ranked the firms with an average turnover of 26.2
billion BEF.
17 To create a group of US firms that are structurally comparable to the German respondents from which the responses to the
questionnaires be compared, the authors dropped 150 US respondents with sales below $133.3 million. In addition, to improve the
matching on the industry structure side, they eliminated three US companies in the gold mining industry, as there are no comparable
companies in Germany.
18 Another valid explanation is the risks exposure of the international operations. In the specific one, the German societies mainly
operated through international operations that, from a side, had the advantage to define an inside monetary market ampler but, from
the other side, determined a greater exposure to potential risks that was managed with a greater employment of derivatives products.

The general pattern of usage across industry and size suggest that the general tendency to use
derivatives was driven by economic issues such as operational activities and firm characteristics.
While firms in both countries indicated that they used derivatives mostly for risk management,
differences appeared in the primary goal of using derivatives, with German firms focusing more
on managing accounting results whereas US firms focusing more on managing cash flows.
Mallin et al. (2001) put on an analysis related to the use of derivatives instruments, to the
kind of covered risks and to the methodologies adopted for their evaluation comparing data with
those in Bodnar et al (1995). The questionnaire was mailed to 800 UK non-financial firms that
were randomly selected from Hemmington Scott’s Corporate Register, which lists companies on
the London Stock Exchange19.
The data showed that of the 231 respondents, 62.1% reported using at least one derivative
instrument. As can be seen from answers, the analysis of the usage of derivatives related to
company size as measured by turnover shows a significant relationship with larger companies
using derivatives instruments more likely than smaller companies
These responses supported previous surveys in that large firms but, in comparison to Bodnar
et al. (1995) they showed lower derivatives usage among smaller firms.
The authors asked firms to indicate the reasons they did not use derivatives. Predominantly,
the most important reason was the lack of significant exposure to financial risk, followed by the
cost of derivatives program, the third most frequently chosen factor was the fact that the exposure
can be managed by other means.
The mostly utilized derivatives instruments by UK non-financial firms were the FRA and
OTC options.
Bodnar et al. (1998) report the results of the third of a series of surveys20 on financial risk
management practice and derivatives use by non-financial corporations in United States. Dealing
with a comparison among the three Warthon surveys, so to define the evolution of derivatives
usage in the time.
The analysed sample consisted of the original randomly 2000 publicly traded firms used in
1994 plus the remaining 154 non-financial Fortune 500 firms added in 199521.
The obtained response rate was of 20.7%.
The very notable results show that the derivatives users rate was in continuous growth
passing from 35% in 1994, to 41% in 1995, up to 50% in survey in matter.
The authors were interested in determining whether there was any change in the intensity of
usage among firms that use derivatives; of derivatives users, 42% indicated that their usage had
increased over previous year, compared to just 13% who indicated a decrease. These response, in
substance, wanted to underline as there was a greater proportion of risk managers that considered
more important the benefits than the consequential costs from the use of these products.
19 Some 231 replies were received from sample of 800, a response rate of 28.9%, which is slightly more than the Bodnar et al.
response rate of 26.5%.
20 The first and the second surveys were conducted in 1994 and 1995, respectively.
21 Specifically, due to mergers, buyouts and bankruptcies since 1994, the sample consisted of 1928 firms.

Another characteristics of American firms were figured out by the analysis of the firm size;
the most greater derivatives users resulted the large firms (83%) followed by the medium-sized
firms (45%) and, finally, from the small ones (12%).
A good response rate was obtained from the analysis conduced by Fatemi and Glaum (2000)
in Germany. It was mailed to 153 great non-financial firms listed on the Frankfurt Stock
Exchange22, and it received responses from 71 of theses firms (answers rate of 46.41%).
The researchers carried out an analysis that could consider all the typologies of risks the
German enterprises should have managed and that could describe the derivatives usage by their
risks managers.
The questionnaire was designed to elicit the respondents’ assessments of how different goals
rank in terms of their importance for risk management; “ensuring the survival of the firms”
turned out the most important goal and “increasing the market value of firms” ranked as the
second most important goal23. Other remarkable purposes, in order of importance, that were
indicated in the answers were: to increase the profitability, to reduce cash flow volatility and to
reduce earnings volatility.
The answers’ analysis relative to financial instruments usage show some very interesting
data. The majority of respondent, 88%, indicated that they used derivatives instruments. This is a
much higher proportion than reported by Bodnar et al (1998) for US firms either in their 1995
survey (41%) or in their 1998 survey (50%). It is also higher than the 78% rate that Bodnar and
Gebhardt (1998) reported for their sample of German firms24.
Among the users, 75% used only the so-called plain vanilla instruments (mainly Forwards
Rate Agreement and Interest Rate Swaps) and the remaining 25% utilized more complex
instruments.
Finally, we can deduce that 89% among players made use of these contracts only for hedging
purpose of the industrials or financials or operatives risks and only 11% did it for speculative
purpose.
Bodnar et al (2003) study derivative usage in the Netherlands They gathered data from a
questionnaire sent to 167 non-financial listed firms producing 84 usable responses (responses rate
of 50.3%).
The results show that 60% of Dutch firms used derivatives versus 44% of US; the difference
among the two countries decreases with the dimensional increase of the societies25.
22 With a minimum 1997 sales volume of DM 400 million, as discriminatory criteria.

23 “The dominance of the survival goal over the market value goal can be seen as a manifestation of the German socio-political
system. Within this system, the firms is often regarded as an entity, in and of itself, which is held accountable to a broad set of
constituents. Shareholders are one of these, albeit (arguable) the most important one. Therefore, it should not come as a surprise that
the survival of the firms ranks as the most important goals for the corporate risk management.” in Fatemi and Glaum, 2000.
24 As a matter of fact, the sample used by Bodnar and Gebhardt also considered the small enterprises; this, considering the evidence
shown by the results of the previews surveys, that the employment of the derivatives is directly proportional to the dimensions of the
societies, makes the results of the two German surveys very closed.
25 In fact, the data show that the 42% of the small Dutch enterprises were derivatives users against only 12% of those American; for
the medium sizes societies the difference is of 11 percentages points (46% American firms against 57% Dutch firms) while the great
enterprises showed a similar use rate (82% United States against 88% the Netherlands).

Moreover, risks managers hedging activity is mainly devoted to the minimization of the cash
flow volatility. The comparative analysis on financial instruments mainly employed by risks
managers shows that for the monetary risk hedge activity in both Countries OTC Forwards
contract are preferred the, followed by options OTC and, in contrast to American societies, any
Dutch firm used the futures contracts; while, the interest rate risks were covered resorting to the
IRSs.
Pramborg (2005) compares derivative usage in Sweden and Korea. The sample was
constituted of 250 Swedish firms listed on the Swedish Stock Exchange and 387 Korean firms
listed on the Korean Stock Exchange26. The response rate was different between the two
countries (42.2% Swedish and 15.5% Korean sample), with a total response rate of 26%.
The questionnaire contained questions regarding: the respondent’s exposure to foreign
exchange rates and whether the respondent firm hedges; the respondent’s use of foreign currency
derivatives (types of instruments, frequency of use, concerns); the respondent’s use of other
foreign exchange risk management methods (foreign debt, internal techniques); and the
respondent’s control and reporting procedures (decision making process, evaluation).
The results suggest both similarities and divergences between the two countries. The most
peculiar difference was the purpose of risks managers: Korean risk managers were more likely to
focus on minimizing fluctuations of cash flows, while Swedish risk managers favoured
minimizing fluctuations of earnings or protecting the appearance of the balance sheet.
Swedish firms were characterized by higher levels of FX exposure for revenues, costs, and
net assets as compared to Korean firms; also, the percentage of firms that indicated no exposure
is similar in both countries. However, the proportion of Korean firms that used derivatives was
significantly lower. This result, as the author explains, may be due to the higher fixed costs
incurred by Korean firms initiating derivatives programs. These higher costs could result from
the relative immaturity of Korean derivatives markets and, perhaps more importantly, from
Korean authorities’ heavy regulation of OTC derivatives use.
Finally, another resemblance is the large proportion of firms in both countries used a profit-
based approach to evaluate the risk management function.
El-Masry (2003) gathered data from a questionnaire sent to 401 non- financial firms listed on
London Stock Exchange and 173 among them completed the questionnaire (response rate was
43.14%). In this study, corporate treasurers were asked a number of questions relating to the
following areas: derivatives use, currency derivatives, interest rate derivatives, options contracts,
and control and reporting policy.
The main results can be considered as a confirmation of some analyses previously effected in
UK27. Out of 173 respondents who returned the questionnaires, 116 (67%) gave details they were
using derivatives; in the size, usage was heaviest among large firms at 56.25%, it dropped to 33%
for medium-sized firms and to 10.0% for small firms28; in the ownership dimension, derivatives
26 Utilities were excluded in both countries.

27 See Judge (1995) e Mallin, Ow-Yong and Reynolds (1997).
28 Large-sized firms are so much more likely to use derivatives because of the economies-to-scale argument for derivative use.

usage was greatest among public companies at 56.25% and the derivatives use rate dropped to
6.25% for private firms.
Among the reasons for which some firms did not use derivatives instruments, data indicate
that 50% of firms did not use derivatives because their exposures were not significant; also, the
most important reasons were: concerns about disclosures of derivatives activity required under
FASB rules; concerns about the perceptions of derivatives use by investors, regulators, analysts
or the public; and costs of establishing and maintaining derivatives programmes exceed the
expected benefits. This is followed by: exposures which are more effectively managed by other
means such as risk diversification or risk shifting arrangements, lack of knowledge about
derivatives and then difficulty pricing and valuing derivatives.
Results reveal that centralised risk management activities were overwhelmingly most
common and that, for firms using derivatives, foreign exchange (FX) risk was the risk most
commonly managed with derivatives. Interest rate (IR) risk was the next most commonly
managed risk.
The data, finally show that the most important reason for using hedging with derivatives was
to manage the volatility in cash flows at 37% of the responding firms.
Anand and Kaushik (2007) analyse the derivatives usage in India, focusing on foreign
exchange risk management. The questionnaire was mailed to 640 companies, which were
common across two most widely used Indian stock market indices29 having foreign exchange
exposure. 55 responses were received leading to a response rate of 8.59%.
Answers show that 70.4% of the respondents firms explained that they used foreign exchange
risk management plan or policy or programme because risk managers had acquired the awareness
that these activities not only mitigate the risks but also allow the reduction of the volatility in
profits and in the cost of the capital, therefore increasing, the value of the firms. Also, the firms
with high debt ratio were more likely to use foreign currency derivatives.
The authors, finally, classified the finalities to which the risks managers tended in their
activity: the major objective of using derivatives is hedging the risk for arbitrage purpose and
price discovery; the speculation as objective of using foreign currency derivative is the least
preferred option.
An important survey, about the risk management policy adopted by corporations was
conducted by Tufano and Servaes (2007). It deals with a “global” study that does not consider
one or more specific risks neither a particular country in which to define the investigation; the
survey, in fact, has been structured to consider a plurality of risks, then brought back to three
macro-sample: the market risks30, the commercial risks31 and the external event risks32. The
29 Namely S&P CNX 500 and BSE 500 firms.

30 These risks relate to price movements in financial markets and include interest rate risk, foreign exchange risk and commodity
price risk as well as possible pension fund shortfalls. They can usually be managed through the use of financial derivatives.
31 These are risks intrinsic to the firm and, to a certain extent, under its control. They include failures of internal processes as well as
actions by competitors. They are typically difficult to manage, especially with financial contracts.
32 These risks are not necessarily firm specific, and relate to non-market external events, such as natural catastrophes or changes in
tax or regulatory policies. Events like litigation are a blend of these risks and commercial risks. External event risks can sometimes be
managed using insurance contracts.

sample contains the Deutsche Bank’s corporate customers in 39 different countries33. The
analysis of the answers by the 334 societies define many important results. Data show that 73%
of the interviews firms used one of the typologies of scenery analysis (as the stress test), from
36% to 45% utilized the measures at-Risk (id est: the VaR, the CaR and the EaR), and only 6%
employed an analysis considering the shareholders value, for example the “shareholder value
analysis” (SVA).
The answers about the instruments utilized in risk management activity display that the most
common instruments were: the assurance tools, the derivatives instruments to hedge the foreign
risk and the interest rate risk34.
3.
SURVEY METHODOLOGY AND SAMPLE
Our study fully traces the survey conducted by Bodnar in 1998 among US non financial
firms35 and was conducted from September 2007 to January 2008. It deals with a web
questionnaire36 containing 40 questions about risk management activity and the derivatives
instruments usage.
It used a data processing guarantor that no connection was made between answers and the
name of the company. The anonymity of responding firms was guaranteed.
Our sample selection had to deal with the low number of non financial listed firms in Italy.
Therefore, we included also non listed (non financial) firms. The selection criteria included all
the firms with a minimum sales revenue value of Euro 500 million realized in 2006 included in
the AIDA database.
As defined above, the sample was restricted to non-financial firms. The sample consists of
526 non-financial firms, 123 listed on Italian Stock Market and 403 unlisted; moreover, we had
to consider that, among these, 62 companies answered that they were not interested to the
analysis, so that the final sample size was of 464 firms. The survey started in September 2007
with telephone calls to the CFOs or Risk managers of firms included in the sample, in order to
obtain the personal e-mail address where to send all the information on the survey. One month
after the first e-mail, we followed up with another e-mail to confirm the delivery of the
questionnaire and the firms’ participation.
We obtained response from 86 firms: 14 listed (with a response rate of 11.38%.) and 72 non
listed (response rate of 33%). The global response rate of 18.53% which is in line with the
33 The sample contains listed and not listed companies; particularly: conglomerates, industrial firms and utilities.
34 They were chosen by 83%, 82% and 79% of interviews, respectively.
35 The original version of the 1997 questionnaire was updated with questions on Energetic/Commodity Risk, Credit Risk, Geo-
Political Risk and Operational risk and customized for Italy.
36 See the questionnaire in Annex 3.

response rates37 reported by M. Bodnar et al. (1998) (20,70%), Jalilvand (1999) (28,10%),
Jalilvand and Switzer (2000) (28,10%), De Ceuster et al (2000) (21,86%), Mallin et al. (2001)
(28,88%), Pramborg (2005) (25,59%) and Fatemi and Fooladi (2006) (21%).
Thanks to the general questions, we had the possibility to sort the surveyed firms by industry
and by size. Insofar, of the 86 firms that have exhaustively completed the questionnaire, 38 are
from the manufacturing sector; 12 from the primary- product sectors; and 10 from retail and
wholesale trade. Table 1, provides a profile of the sample firms.
Table 1
Firms by Industry
Industry
No. % sample
Firms
Manufacturing 38 44.2%
Transportation/Energy 12 14.0%
Retail/Wholesale 10 11.6%
Mining/Construction 6 7.0%
Communications/Media 4 4.7%
Tech (Software/Biotech) 4 4.7%
Service/Consulting 2 2.3%
Other 10 11.6%
Banking/Finance/Insurance 0 0.0%
In terms of head offices, we received answers primarily from north-west Italy (37%) followed
by centre and north-east with the same percentage (26%) and, at last, the south and islands with
only 2%. In term of size, we divided our sample in sub-groups according to sales revenues;
sample distribution by firm size is shown in Table 2.
37 A notable exception is Hakkarainen at al. (1997), who obtained a response rate of over 80% for their sample of 100 largest
Finnish companies.

Table 2
Firms by sales revenues.
Sales Revenue
Number of answers Percentage
Less than Euro 24 million 0 0.0%
Euro 25-99 million 7 8.1%
Euro 100-499 million 16 18.6%
Euro 500-999 million 33 38.4%
Euro 1-4.9 billion 27 31.4%
Over Euro 5 billion 3 3.5%
4.
DERIVATIVES OR INSURANCE INSTRUMENTS’ USAGE AND USAGE
INTENSITY BY 1999
The first question was designed to know if firms manage their risks, and, if so, which
category of instruments (derivatives and/or insurance contracts) they utilize and, at least, to
determine whether there was any change in their usage intensity of these instruments after the
Euro introduction.
We considered eight typologies of risks, as shown in figure 1: foreign-exchange risk, interest
rate risk, energetic risk, commodity risk, equity risk, counter-party risk, operational risk and
country risk.
The figure reveals that the most commonly managed risk by risk managers is the foreign-
exchange risk: more than 67% of the respondents answered to do it. Interest rate risk is the next
commonly managed risk with 60.47% followed by the counter-party risk with 30.23%.

Figure 1
Management and Used Instruments
6,98%
Exchange-foreign 55,81%
67,44%
9,30%
Interest rate 58,14%
60,47%
25,58%
0,00%
Counter-party
30,23%
4,65%
Commodity 23,26%
25,58% Management
4,65% Derivatives tools
Energetic 20,93%
20,93% Insurance tools
13,95%
Country 2,33% 18,60%
0,00%
Equity2,33%
4,65%
20,93%
0,00%
Operational
0,00%
0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00% 70,00%
We were also interested in the percentage of firms that use derivatives to manage risk in each
of these eight classes to compare it to the percentage of firms that, opposite, use insurance
instruments.
As the figure shows, the derivatives tools are mainly utilized to manage the foreign-exchange
risk by 56% of respondents; interest rate risk derivatives instruments are used by 58%; energetic
risk and commodity risk derivatives are utilized by 21% and 23% of the respondents,
respectively.
On the other hand, 26% of risk managers mainly utilize the insurance instruments to manage
the counter-party risk; the operational risk are manage by assurance tools by 21% of them; the
third mainly hedged risk typology by insurance instruments is the country risk by 21% of the
respondents.
As underlined by the data, the use of derivative tools is more widespread among the Italian
firms compared to the use of insurance tools but this is only for some typologies of risk (for
example, in foreign-exchange risk management there is a difference of 49%). On the contrary,
considering the counter-party risk or the operational risk the tendency is reversed: data show that
derivatives instruments are not quite used.
It should be noted that unlike of exchange risk such as interest rate risk, which are likely to be
faced by all firms, same firms will not directly face others categories of risk, as equity, country,

counter-party and operational risk because of the nature of their activity. Consequently, the usage
of derivatives in these classes, will be even higher than the numbers displayed in the figure.
Whilst the evidence suggests that the percentage of firms using derivatives or insurance
instruments has not changed noticeably, we were also interested in determining whether there
was any change in the intensity of usage among the firms after the Euro introduction. To consider
this, firms were asked to indicate the usage intensity of their derivatives and insurance tools by
1999 choosing among high, medium or low level.
Table 3
Usage Intensity by 1999
Usage intensity by 1999
Insurance tools Derivatives tools
Risks High Medium Low High Medium Low
Exchange-foreign 2,33% 2,33% 11,28% 23,26% 18,60% 23,26%

Interest rate 0,00% 2,33% 13,95% 4,65% 25,58% 27,91%
Energetic 0,00% 2,33% 4,65% 2,33% 4,65% 13,95%
Commodity 2,33% 0,00% 4,65% 9,30% 4,65% 13,95%
Equity 0,00% 0,00% 2,33% 0,00% 0,00% 4,65%
Counter-party 11,28% 6,98% 4,65% 0,00% 0,00% 2,33%
Operational 6,98% 9,30% 2,33% 0,00% 0,00% 2,33%
Country 11,28% 2,33% 4,65% 0,00% 0,00% 2,33%
Table 3 displays the response to this question for each type of risk. The first evidence that we
can underline is the fact that, for each risk category derivatives users indicated a low intensity of
usage more than a high intensity; opposite, this tendency is not confirmed by insurance
instruments (in counter-party risk or country risk management the respondents report a higher
percentage of high intensity of insurance instruments usage than percentage of low intensity).
Overall, these responses suggest that a significant proportion of economic operators is not
finding derivatives helpful enough to increase so much their usage and, moreover, that maybe
this situation is mainly defined by the low knowledge of derivative instruments among the Italian
firms.
5.
DERIVATIVES USAGE CONDITIONAL ON SIZE AND ACTIVITY
We were also interested to define the relation between the size group and the industrial sector
with the derivatives usage. We set up a cross-tab between the sales revenue value and the data
from derivatives usage and between the industrial sectors and the data from derivatives usage. As
a result we obtained Figure 2 and Table 4.

According to firms’ size, Figure 2 displays that derivatives instruments’ usage is heaviest
among large firms in every risk typologies and, in the area of commodity and equity risk
management, large firms are the unique size group that uses these instruments in its management
activity.
About this analysis there is an exception, the derivatives instruments are used only by
medium-size firms in country risk management activity. Moreover, as shown by Figure 2 the
percentage of the small-sized firms that use the derivatives instruments is rather insignificant
compared to medium and large firms’ percentage, and more data report a derivatives usage’s
minimum value only in the exchange foreign and interest rate risk management.
The fact that large firms are more likely to use derivatives is suggestive of an economies-to-
scale argument for derivatives use, with large firms better able to bear the fixed cost of
derivatives use compared to medium and small sized-firms.
Figure 2
Derivatives Usage Response Rates By Size
Derivatives Usage Response Rates By Size

100% 100% 100%
100,00%
90,00%
80,00%
70,00%
60,00% 55,55%
50%
50,00% 45,45%
45,45% 45,45% 44,44%
Small
40,00%
Medium
30,00%
Large
20,00%
10,00% 9,09%
4,55%
0,00%
Exchange- Interest rate Energetic Commodity Equity Country
foreign
Derivatives Tools
Table 4 describes the percentage of derivatives usage by each specific industry: the
derivatives usage is greater among manufacturing firms; the percentage that we can see in
currency, interest rate and commodity risk is greater than the percentage of the others sectors; this
is not confirmed in energetic and equity risk where they result in second position behind the
primary product producers as principals derivatives instruments’ users.
Therefore, these data describe that the derivatives instruments are mostly used by
manufacturing firms and primary product producers.

Theory and the evidence from others countries, remark that futures exchanges were originally
established to help manage commodity risks, so that our data confirm previous results.
The fact that the manufacturing firms belong to one of industrial sectors that use mostly
derivatives instruments in their management activity is likely driven by foreign currency
exposure arising from foreign operations or exporting and importing.
Table 4
Cross-tab Derivatives Instruments & Industry
Derivatives tools
Industry Exchange Interest rate Energetic Commodity Equity Country
Foreign
Retail/ 4,55% 13,64% - 10% - -
Wholesale
Mining/ 4,55% 9,09% - 10% - -
Construction
Manufacturing 54,55% 45,45% 33,33% 50% - 100%
Transportation/ 18,18% 18,18% 66,67% 20% 100% -
Energy
Communications/ 4,55% - - - - -
Media
Tech 9,09% 9,09% - - - -
Banking/ - - - - - -
Finance/
Insurance
Service/ - - - - - -
Consulting
Other 4,55% 4,55% - 10% - -
6.
EXPECTED BENEFITS FROM RISK MANAGEMENT ACTIVITY
The second question was to understand which were the most important benefits that managers
expected from their risk management activity. Therefore, we asked firms to indicate the
importance of nine listed goals on a increasing scale, among “very important – important – non
important – don’t know” (Table 5).
The most important purposes of risk managers appear to be “Avoids large losses from
unexpected price movements /events (VaR)” and “Shareholders expect us to manage risk”.
“Reduces operating cash flow volatility” ranks as the third most important goal (20,93%). Other
important goals, in order of importance are “Increases reported earnings predictability” (9.3%)
and “Improve the firm’s credit ratings (spread out)” and “Reduces the firm’s cost of equity” (both
with a score of 6.98%).

Table 5
Degree of Importance of same Potential Benefits of Financial Risk Management Strategy
Potential Benefits of Financial Risk Very Important Not Do Not
Management Strategy Important Important Know
Avoids large losses from unexpected 32,56% 44,19% 16,28% 6,98%
price movements /events (VaR)
Shareholders expect us to manage risk 32,56% 30,23% 25,58% 11,63%
Reduces operating cash flow volatility 20,93% 58,14% 16,28% 4,65%
Increases reported earnings predictability 18,60% 44,19% 30,23% 6,98%
Increases the firm’s expected future cash flows 9,30% 30,23% 46,51% 13,95%
Improve the firm’s credit ratings (spread out) 6,98% 23,26% 51,16% 18,60%
Reduces the firm’s cost of equity 6,98% 32,56% 53,49% 6,98%
Decreases volatility of share price 4,65% 30,23% 53,49% 11,63%
Other 2,33% 2,33% 4,65% 90,70%
Consistent with these results, when asked to choose only one goal among the list presented in
previous question as the most important benefit, the majority (39.53%) choose to avoid large
losses from unexpected price movements /events (VaR)”.

Figure 3
Most Important Benefit expected from Financial Risk Management
Most important benefit
VaR 43,59%
Reduces operating cash flow volatility 28,21%
Increases reported earnings predictability 12,82%
Shareholders expect us to manage risk 7,69%
Decreases volatility of share price 2,56%
Increases the firm’s expected future cash flow s 2,56%
Reduces the firm’s cost of equity 2,56%
Improve the firm’s credit ratings
Other
0%
5%
10
15
20
25
30
35
40
45
50
%
%
7.
CONCERNS ABOUT DERIVATIVES USAGE
The use of derivatives in today’s market involves many issues. Question 3a asked
respondents to indicate their degree of concern about a series of issues regarding the use of
derivatives. These issues include: accounting treatment, credit risk, market risk (unexpected
changes in prices of derivatives), monitoring and evaluating hedging results, reaction by analysts
and investors, disclosure requirements, and secondary market liquidity. For each issue, we asked
firms to indicate the degree of concern, among a high, moderate, or low level, or indicate that the
issue is not a concern to them. Firms were also given the option of listing any other issues of
great concern to them regarding derivatives use.
Given to propensity of a majority of firms to indicate a moderate level of concern and the
“not concern” with many issues, Figure 4 indicates the percentage of firms by degree of concern
for the seven issues.

Figure 4
Concerns Regarding Derivatives
Degree of Concerns about some Issues
22,50%
Monitoring and evaluating hedge results 37,50%
35,90%
Market risk 25,64%
31,71%
Credit risk 17,07%
26,83%
Accounting treatment 14,63%
28,21%
Disclosure requirements 10,26%
Other 7,69%
30,77%
Secondary market liquidity 7,69%
Reaction by analysts or investors 7,50%
0,00% 5,00% 10,00% 15,00% 20,00% 25,00% 30,00% 35,00% 40,00%
High Low
Monitoring and evaluating hedging results is the issue causing the most concern among
derivatives users, with 34.88% of the firms indicating a high concern, 20.93% low and 13% no
concern with this issue.
Market risk, defined as unforeseen changes in the market value of derivative position, is the
second issue underlined by firms, with 23.26% of the firms indicating a high degree of concerns
but, opposite, more than 32% of the surveyed firms indicate a low degree of concerns.
This is followed closely by credit risk with 16.28% of the firms indicating a high degree of
concerns but there are more than 30 points of percentage of the respondent indicate a low degree
of concerns.
The remaining issues has significantly more firms indicating little or no concern as compared
to high concern.
We also asked firms to indicate their most serious concern for the items listed above.
Surprisingly, market risk is revealed to be the most serious concern (30.23%), followed by
monitoring and evaluating hedging results with 18.6% of the firms ranking this as their most
serious concern.

8.
THE RISK MANAGEMENT ACTIVITY IS BEEN INFLUENCED BY IAS
NEW ACCOUNTING RULES?
Questions 5a asks respondents to describe which kind of impact have produced the new
accounting rules (International Accounting Standard n° 32 and n° 39) on risk management
activity.
From 2005 the rated companies had to observe the international accounting principles IFRS
(International Financial Reporting Standard) in the editing and in the presentation of the business
budgets. Objective of the IFRSs, along with harmonization of formalities of budget editing, is to
bring nearer the book value to the current value of the firm.
The application of the principles IAS 32 and IAS 39, that introduce particularly a new
classification of the financial tools, involves also meaningful innovations in the accounting
management of the operations of coverage effected through the use of derivatives instruments.
Particularly, the IAS 39 focuses on the evaluation of the financial tools specifying the field of
use of the fair value as evaluation criterion. Moreover, in this principle is detailed when must
adopt the fair value, when the historical cost or the amortized cost as evaluation criterion. This
principle also specifies when it is necessary to consider the variation of the fair value to balance
sheet and when to revenue account.
The international accounting principles forecast the finding of the derivatives to the contract
stipulation’s date in the system of general accounting and the visualization in the asset of the
balance sheet.
Figure 5 displays our results. More than 68% of the firms answered that the new accounting
rules did not have effect on their risk management activity. The remaining 31.71% declared that
the new accounting rules have as consequence “a reduction of derivatives usage” and “a change
in the types of instruments used” defined by 12.2% of the respondents in both cases, or “a change
in the timing of hedging transactions” with 6.98%.

Figure 5
Impact of the IAS’s New Rules
The most likely Impact of the IAS’s New Rules on Derivatives Accounting
7,32%
12,20%
12,20%
68,29%
No effect on derivatives use or risk management strategy A reduction in the use of derivatives
A change in the types of instruments used Alter the timing of hedging transactions
FOREX Risk - Currency Exposure
Respect to the currency risk, the first question presents an hypothetical situation, in order to
understand the weight of the financial operations in Euro currency compared to the operations in
another currency. Specifically, the defined hypothetical situation had the goal to individualize the
impact of a Euro’s devaluation of 10 points percentages, in comparison to the foreign currencies,
on the firm’s risk value. Almost 50% of the sample has answered that they will not have any
fluctuation from this hypothetical situation and a low percentage of the respondents define a
possible fluctuation of their risk value greater than 5%.
The outcomes deduced by this question confirm that the majority of respondents manage the
foreign exchange exposure (as shown above, in the question 1) and that, therefore, this
hypothetical situation has some marginal effects on the firm’s risk value.
Particularly, to learn about the exposure of the analyzed sample, question 7 asks firms to
indicate their percentage of total revenues and costs in foreign currency.

As Table 6 shows a reasonable percentage of firms reports either “no foreign currency
revenue” (27.50%) or “no foreign currency cost” (15.38%); another reasonable percentage of the
respondents have answered that their foreign currency revenue or cost are less than 10%, 27,50%
and 46.15% respectively; on the other hand, more than 40% of the firms report foreign currency
revenues to be more than 10% of total revenue, while 35% of the firms report foreign currency
costs to be more than 10% of total expenses. So, many firms in the sample have significant
foreign exposure.
Table 6
Percentage of Consolidated Revenues and Costs Based in Foreign Currencies
Percentage based in foreign % of consolidated revenues % of consolidated costs
currencies
0% 27,50% 15,38%
5-10% 27,50% 46,15%
10-20% 12,50% 20,51%
20-30% 12,50% 5,13%
30-40% 5,00% 2,56%
40-50% 7,50% 7,69%
50-60% 5,00% 0,00%
60%+ 2,50% 2,56%
FOREX Risk - Transactions in Derivatives Markets and Typology of Risk

Management Activity
Not much is known about the extent to which firms hedge their various exposures, so we
asked firms to indicate the percentage of perceived exposure, across various categories of
currency exposure, that they typically hedge. These categories of currency exposure are: foreign
repatriations, contractual commitments, anticipated transactions within one year, anticipated
transactions beyond one year, operating/competitive exposure and translation of foreign
accounting statements.
Table 7 reports the percentage of firms that have responded in each of the five proportion of
exposure hedge for each of seven different categories of exposure. The table displays that with
the exception of three types of exposure, “Contractual commitments – Anticipated transactions
within one year - Competitive exposure”, the majority of firms hedge less than 25% of their
perceived exposure.
However, in the cases of these three types of exposure, the firms’ percentage that defined to
hedge more than 75% of the total exposure is not so high, 10.71%, 14.29% and 22.22%
respectively. Thus, partial hedging appears to be normal practice for these firms.
This evidence is confirmed, and partly justified, by the last column of the table; it expresses
the percentage of the companies that answered not to be exposed to that specific category of

exposure. As we can see, the firms’ percentage that answered not to be exposed is 25% or more
for each specific category of exposure.
Table 7
Percentage of Foreign Currency Exposures Typically Hedged
Percentage of Firms Responding in the Following Ranges for the Proportion of Exposure
Hedge
Classes of 0% 1-25% 26-50% 51-75% 76-100% N/A
exposure
Foreign 42,86% 7,14% 0,00% 3,57% 3,57% 42,86%

repatriations
(e.g., dividends,
royalties)
Contractual 35,71% 25,00% 0,00% 3,57% 10,71% 25,00%
commitments
Anticipated 14,29% 25,00% 14,29% 7,14% 14,29% 25,00%
transactions
within one year
Anticipated 34,62% 19,23% 3,85% 3,85% 3,85% 34,62%
transactions in
more than one
year
Operating/ 7,41% 33,33% 11,11% 11,11% 22,22% 14,81%
Competitive
exposure
Translation of 29,63% 14,81% 3,70% 3,70% 0,00% 48,15%
foreign
subsidiary
financial
statements
Other 31,25% 0,00% 0,00% 0,00% 0,00% 68,75%
Question 9 asked companies to point out the implementation nearest to their reality among 5
possible choices. (see the annex 2 page 42).
In more than 50% of questionnaires, no answer was given to this question: data reported in
Figure 6 refers to the percentage of respondents to the questionnaire.
The mainly used technique results “by each exposure separately as they arise within each line
of business / division” with 44.44% of the respondents that have chosen this technique, followed
“by pooling/netting across classes of exposures and pooling across lines of business / divisions”
with more than 33%.

Figure 6
Typology of Foreign Exchange Risk Management Activity
Typologies of Implemantation of FX Risk Management

Activity
11,11%
11,11%
44,44%
33,33%
By each exposure separately as they arise w ithin each line of business / division
By pooling/netting across classes of exposures and pooling across lines of business / divisions
By netting w ithin separate classes of exposure w ithin each line of business / division
By each separate class of net exposures pooling across many lines of business / divisions
FOREX Risk - Instruments in Foreign-Currency Risk Management
Our analysis is not only finalized to illustrate the typologies of managed risks in the
management activity but, also, to determinate the mostly used financial instruments in this
activity.
Question 10 asked managers to point out the used tools among ten instruments that we have
listed in the same question.
Figure 7 illustrates the financial instruments’ list and, for each of them, the percentage of the
respondents that point out in what measure that specific tool is used in foreign exchange risk
management.

Figure 7
Instruments’ Usage in foreign-exchange risk management.
Instruments Used in FX Risk Management
Forw ard contracts 55,81%
OTC options 25,58%
Currency sw aps 23,26%
Money market contracts and FOREX positions 18,60%
Option combinations (e.g., collars, straddles) 18,60%
Futures contracts 9,30%
Foreign currency debt financing 9,30%
Non deliverable forw ards 4,65%
Excange trated options 4,65%
Other 2,33%
0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00%
As the figure shows, the most commonly used instruments are the Forward contracts (55.81%
). Far from these, there are OTC options, followed closely by currency swaps indicated by
23.26% of the respondents as the most commonly used instruments.
We were also interested to know the opinion of the Italian risk managers about the three most
important instruments among these listed in previous question; we asked firms to list, in order of
importance among three of these instruments. The results confirm the same tools defined before,
or rather: the most important used instruments is Forward contract, the second most important is
OTC option and the third most important is currency swap.

FOREX Risk - Benchmark for Evaluating Foreign-Currency Risk
Management
One question focused on the benchmarks that firms use to evaluate the risk management
process. For currency risk management, we asked which benchmarks they use to evaluate
foreign-currency risk management over the budget/planning period. Figure 8 displays the
responses. Out of the firms surveyed, 37.50% indicated that they did not have a benchmark for
evaluating the foreign-currency risk management process. Of the remaining responding firms, the
most common benchmark was the use of the forward rates available at the beginning of the
budget/planning period. Particularly, of the firms with some benchmarking, 26.32% use a pre-
defined percentage-hedge benchmark (25%) and 20% of them use the forward rates.
15% of the companies of our survey indicated to use the spot rates available at the beginning
of the period and the exchange rates available at the previous period. These approaches are
questionable on theoretical grounds as the current spot rates and the previous exchange rates do
not incorporate any market expectations of currency movements over the period nor do they offer
rates at which any risk could actually be laid off.
Out of the firms with some forms of benchmark, 10% use the forecast variance analysis and
another 10% use the forecasted variance R (risk adjusted basis)
Finally, 5% of the responding firms indicated the use of some other forms of benchmark.
Despite the fact that some of these ideas have more value than others, it is worrying that more
than 37% of the firms do not have a well specified benchmark for evaluating whether their
currency risk management process is providing any useful service to the firm.

Figure 8
Benchmark usage in evaluating FX risk management strategy
Benchmark's Usage
Our firm does not use a benchmark 37,50%
Of those w ith a benchmark:
A pre-defined percentage-hedged benchmark 25,00%
Beginning of period forw ard rates 20,00%
Beginning of period spot rates 15,00%
Exchange rates from previous period (quarter or year) 15,00%
Forecast variance analysis 10,00%
Forecasted variance R – risk adjusted basis 10,00%
Other 5,00%
0,00% 5,00% 10,00% 15,00% 20,00% 25,00% 30,00% 35,00% 40,00%
FOREX Risk - Influences from the Market View and from Euro Currency as
Foreign Exchange Reserve
Financial managers typically found difficult to avoid letting their own view of the currency
market affect their risk-management activities. Therefore, we asked firms to indicate the
frequency with which their market views cause them to alter the timing or size of their hedges or
to actively take a position in the market using derivatives. The responses to this question are
presented in Figure 9.

Figure 9
Market View of Exchange Rates’ Influences.
50,00%
45,00%
40,00%
35,00%
30,00% 42,86%
25,00%
33,33%
20,00% 33,33%
15,00%
10,00%
5,00% 7,14% 3,70%
0,00%
Alter the timing of Alter the size of hedges Actively take positions
hedges
Frequently Sometimes
In response to the first part of the question, 7.14% of the firms indicated that their market
view on exchange rates “frequently” altered the timing of hedge and 3.70% of them indicated that
their market view on exchange rates “frequently” altered the size of hedge that they entered into.
A large number of firms occasionally incorporate their market view into their hedging decision,
with of the firms “sometimes” altering the timing of their hedges and one third of the firms
“sometimes” altering the size of their hedges.
Without entering the debate about what constitutes a hedge and what constitutes speculation,
it is apparent that a majority of respondents sometimes takes into account their opinion about
market conditions when choosing a risk-management strategy, but there is a significant
percentage of firms who answered they never took into account their opinion about market
conditions when choosing a risk-management strategy (more than 50% for each of potential
activity).
About the third part of the question, the figure shows that only 33.7% among the respondents
takes “sometimes” position based on a market view of the exchange rate.
A particular characteristic about the Italian firms, that comes out from this survey, is obtained
when we asked if the fact that the Euro currency became a foreign exchange reserve could have
same effects on firms’ coverage level of the exchange risk. The answers define that more than
75% of the firms consider this event without consequences on their coverage level of the
exchange risk.

9.
INTEREST RATE RISK MANAGEMENT
Interest rate risk is the second category of risk managed by Italian non-financial firms. Table
8 displays the frequency of usage of IR derivative activity across four common uses. Italian firms
seem to be more frequent users of IR derivatives for purposes of swapping from floating rate debt
payments to fixed rate debt payments and fixing a rate on new debt. Overall, the most common
used interest rate derivative is the swap from floating to fixed rate debt: 42% of firms use this
instrument at least “sometimes”. This result is consistent with the results of Bodnar and Gebhardt
(1999) for German and US companies.
Table 8
Frequency of transactions in the interest rate derivatives market (%)
Transactions in IR Derivative Frequently Sometimes Rarely N/A
Markets
Swap from fixed rate to floating 0.00 7.89 21.05 71.05
rate debt
Swap from floating rate to fixed 15.79 26.32 23.68 34.21
rate debt
Fix in advance the rate (spread) on 15.79 13.16 21.05 50.00
new debt
Reduce costs or lock-in rates for 8.11 24.32 24.32 43.24
future financing
These results are strengthened once we compared the different financial tools used by Italian
firms: interest rate swaps are the most popular instruments with more than 50% of respondents
ranking them as the “most important” instrument. Interesting to notice is the relative high use of
option combinations (22%).
Table 9
Preference among interest rate derivative instruments
Forward rate agreements 9.30%
Interest rate futures -
Interest rate swaps 55.81%
Interest rate swaptions 6.98%
OTC IR options 2.33%
Exchange-traded options 2.33%
Option combinations 20.93%
Alter the timing of debts 4.65%
Other 2.33%

When we asked companies to describe the benchmark they adopt for evaluating the IR risk
management of debt portfolio nearly 40% doesn’t use any benchmark. Among those who use
benchmarks, realized cost of funds relative to a market index (e.g. Libor) is the benchmark used
by nearly 60% of firms respondents (see Table 10).
Table 10
Benchmarks used for evaluating IR risk management of debt portfolio
Benchmark %
Our firm does not use a benchmark for the debt portfolio 38.24%
Of those with a benchmark:

Realized cost of funds relative to a portfolio 14.29%
with a specified ratio of fixed to floating rate debt
Realized cost of funds relative to a market index (e.g. Libor) 57.14%
Realized cost of funds relative to a portfolio with a specified duration 14.29%
The volatility of interest expense relative to a specified portfolio 9.52%
Other benchmark 4.76%
Total 100%
10.
ENERGY AND COMMODITY DERIVATIVES USAGE
Only recently, energy and commodity risk have become a component of the risk management
function for non financial firms (Bodnar and Gebhardt, 1999). This evidence conflicts against the
distinguished volatility of commodity indexes, even higher than currencies. Among commodities,
energy ones, electricity in particular, show an unpredictability rate which suggests the hypothesis
that an essential loss component depends upon these factors.
Nevertheless, when we asked how many different types of energy and commodity price
exposures the firm would evaluate and manage, only 21% answered 1 or more than 1 (table 11).

Table 11
How many different types of energy price and commodity price exposures does your firm
evaluate/manage? (%)
0 1 2+ N/A
Energy (fuel/electricity): 23.26% 6.98% 13.95% 55.81%
Commodities (agricultural/non-oil primary 25.58% 11.63% 9.30% 53.49%
products)
The only difference among energy and commodity risk is the number of price exposures
measured by risk managers: 14% are worried of 2 or more than energy risk factors, only 9.3% are
worried of 2 or more than commodity risk factors, such as agricultural and non-oil primary
products.
Then we compared the financial tools used by firms. Most of firms have a preference for
over-the-counter ones, such as swaps, forwards and OTC Options with their combinations (table
12).
Table 12
Percentage of used instruments in energy/commodity risk management
Forward contracts 18.60%
Debt contracts with embedded options 0.00%
Futures contracts 16.28%
Non deliverable forwards 2.33%
OTC Options 11.63%
Exchange traded options 2.33%
Option combinations 9.30%
Swaps 16.28%
Foreign currency debt financing 0.00%
Other 0.00%
Plain vanilla and non deliverable forwards are used by 20.93% of our sample; swaps by
16.28% and OTC options by 11.63% and option combinations (such as collars and straddles) by
9.3%.
The questionnaire asked to find out the most important derivative to hedge the commodity
risk. If compared the Italy situation with those analysed in Germany and the USA in 1999 shows
the following features (figure 10):
- in Italy the most important derivative contract is supposed to be the futures (28.9%), the same
for Germany but lower than the US firms (40,4%);
- forwards and futures appear to be equally weighted, while in Germany forwards are
predominant (55.5%). This depends on the lower importance of regulated markets in Europe
than USA;
- roughly 20-25% of firms prefer swaps in the USA and Italy, only 11% in Germany;

- options only for a little number of firms is considered the first instrument to hedge risks. In
Italy structured options are the most important for 14 firms out of 100: this could depend on
the different period of the surveys and the recent development of option combinations in
banks’ portfolios.
Figure 10
Preference over Energy and Commodity Derivative Instruments (the most important hedge
instrument) in Italy (2007), Germany and USA (1999)
Swaps Italy
Germany
USA
Option combinations
Exchange options
OTC Options
Futures contracts
Forward contracts
0.0 10.0 20.0 30.0 40.0 50.0 60.0
11.
OPERATIONAL RISK MANAGEMENT
According to Basel 2, operational risk is defined as the risk of loss resulting from inadequate
or failed internal processes, people and systems or from external events. It includes internal and
external fraud, Employment Practices and Workplace Safety, Clients, Products & Business
Practices, Damage to Physical Assets, Business disruption and system failures, Execution,
Delivery & Process Management.
In Italy, 37,2% of our sample evaluates operational risks for any of the processes.
We asked whether decision to introduce metrics in order to measure the risk was correlated to
the blackout event that occurred in 2003. That episode was a serious power outage that affected
all of Italy for 9 hours on 28 September 2003. It was the largest blackout in the series of

blackouts in 2003, affecting a total of 56 million people. It was also the most serious blackout in
Italy in 20 years.
Actually, only 17,2% of firms asserts that more importance was devoted to the sensitivity to
operational risk management. All the others did not change the approach and about 10% reduced
the investments in ORM.
Figure 12
The change in the role of operational risk, after the black out in Italy of September 2003
80,00% 72,41%
70,00%
60,00%
50,00%
40,00%
30,00%
17,24%
20,00%
6,90%
10,00% 3,45%
0,00%
much less less emphasis about the same more emphasis much more
emphasis emphasis
In order to measure the operational risk, most of the firms appear to be vague when asked the
kind of database they use. Table 13 shows firms’ answers: only 14% asserts the usage of specific
database or a simulation model.

Table 13
Which kind of dataset was used to estimate the operational losses?
Event Type Internal External Simulation No answer
High Frequency Low Impact 2,33% 6,98% 4,65% 86,05%
Low Frequency High Impact 4,65% 4,65% 4,65% 86,05%
The operational risk management appears to be very conventional (table 14). 94,1% of firms
hedges operational losses with traditional insurance contracts, while alternative risk transfer tools
are unknown.
Only the case of catastrophe options are used by firms.
Table 14
Contracts used to manage the operational risk
Contract Use (%)
Insurance contracts 94,12%
First loss to happen put 0,00%
Cat bond 0,00%
Insurance Alternative Risk Transfer 0,00%
Operational Risk Swap 0,00%
Cat options 5,88%
12.
CONCLUSIONS
This paper presents a survey on the risk management function and the usage of hedging
instruments by non-financial firms. The outcomes of the survey, conducted both for listed and
non-listed firms, suggest that Italian firms are less likely to use derivatives than US firms.
The percentage of firms using derivatives or insurance instruments has not changed
noticeably since 1999 (that is, the beginning of the euro period). The use of derivatives is more
significant among large firms in every risk typology and, in the area of commodity and equity
risk management, large firms are the unique size group that uses these instruments in its
management activity. The fact that large firms are more likely to use derivatives is suggestive of
an economies-to-scale argument for derivatives use.
The reasons to explain the limited practice in derivative markets are as follows:
- Insufficient exposure to risk area to warrant management;
- Exposure more effectively managed by other means;
- Difficulties in monitoring/measuring contract effectiveness.

Table 15 shows the distribution of these factors among different risks.
Table 15
The most important factor(s) for not using derivatives
FX IR EN CM EQ CR GP OR
Insufficient exposure to risk 6.95 - 9.30 11.60 13.93 9.27 13.93 6.95
area to warrant management
Exposure more effectively 2.30 - 4.65 2.30 2.30 2.30 2.30 4.65
managed by other means
Difficulties in - 2.30 - - - - - -
monitoring/measuring contract
effectiveness
According to Italian risk managers no other reasons should explain the intensity in derivative
use, such as, (i) concerns about external perception of derivative/insurance use; (ii) costs of risk
management greater than benefits; (iii) expected price to move in firm’s favour; (iv) shareholders
expectations to manage risk; (v) uncertainty of timing and/or size.

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BERKMAN H.; BRADBURY M. E., MAGAN, S., "An international comparison of derivatives use",
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BLOCK S. B., GALLAGHER T. J., "An empirical study of the utilization of futures and options by
corporate management", (1986).
BODNAR G. M., GEBHARDT G., "Derivatives Usage in Risk Management by US and German Non-
Financial Firm: A comparative Survey", Journal of International Financial Management and
Accounting 10:3 (1999).
BODNAR G. M.; DE JONG A., MACRAE V., "The impact of Institutional Differences on Derivatives
Usage: a Comparative Study of US and Dutch Firms”, European Financial Management vol. 9, No. 3
(2003), pp. 271-297.
BODNAR G. M.; HAYT G. S., MARSTON R. C., "1998 Wharton survey of financial risk management by
US non-financial firms" Financial Management vol. 27, n°4 (1998), pp. 70-91
DE CEUSTER M. J. K.; DURINK E.; LAVEREN E., LODEWYCKX J., "A survey into the use of
derivatives by large non-financial firms operating in Belgium", European Financial Management vol.
6, n° 3 (2000), pp. 301-318.
DOLDE W., "The trajectory of corporate financial risk management", Journal of Applied Corporate
Finance, Vol. 6, n° 3, (1993).
EL-MASRY A., "A survey of derivatives use by UK non financial companies", Social science research
network Manchester Business School 455, (2003).
FATEMI A., FOOLADI I., "Credit risk management: a survey of practices", Managerial Finance Vol. 32,
n°3, (2006).
FATEMI A., GLAUM M., "Risk management practices of German Firms", Managerial Finance, (2000).
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survey of economic theory and evidence”, in R. B. Walsh, Financial Risk and Corporate Treasury
(London: Risk Publications, 1977), pp. 13-31.
HAKKARAINEN A; KASANEN, E., PUTTONEN V., "Interest rate risk management in major Finnish
firms”, European Financial Management Vol. 3, No. 3 (1997), pp. 255-268.
JALILVAND A., "Why firms use derivatives: evidence from Canada", Canadian Journal of
Administrative Sciences Vol. 16, n° 3 (1999), pp. 213-228.
JALILVAND A., SWITZER J., "A global perspective on the use of derivatives for corporate risk
management decisions", Managerial Finance Vol. 6 n. 3 (2000).
JUDGE A., "Hedging and the use of derivatives: evidence from UK non-financial firms", subsequently
published with the title: "Why and how UK firm hedge", European Financial Management Journal
Vol. 12, No. 3 (2006), pp. 407-441.
LODERER C., PICHLER K., "Firms, do you know your currency risk exposure? Survey results", Journal
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Comparative Survey", Pacific-Basin Finance Journal vol. 13 (2005), pp. 343-366.
SERVAES H., TUFANO P., "The Global Survey of Corporate Financial Polices and Practices".
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Quantitative Analysis, Vol. 20, n° 4, 1985, pp. 391-405.

ANNEX 1 – PREVIOUS SURVEYS
Authors Year Country Focus

Block S. B. - Gallagher T. J. 1986 United States Study about interest rate risk management tools. Particularly, futures and options usage.
Dolde W. 1993 United States Study about exchange and interest rate risk management tools
Berkman H. - Bradbury M. E. 1996 New Zealand Study about derivatives use
Hakkarainen A. - Kasanen E. - Puttonen V. 1997 Finland Study about interest rate risk management tools. Particularly, comparison with other country
Berkman H. - Bradbury M. E. - Magan S. 1997 New Zealand Study about derivatives use and comparison with American studies
Bodnar G. M. - Hayt G. S. - Marston R. C. 1998 United States Study about derivatives use to define the evolution of derivatives usage in the time.
Alkebäck P. - Hagelin N. 1999 Sweden Study about derivatives use and comparison with U.S. and New Zealand study.
Bodnar G. M. - Gebhardt G. 1999 Germany Study about derivatives use in risk management activity (interest rate risk, exchange risk and commodity risk)
Jalilvand A. 1999 Canada Study about derivatives use and comparison with U.S. and New Zealand study.
Fatemi A. - Glaum M. 2000 Germany Study about risk managers activity. Particularly, financial and non financial risk management.
Loderer C. - Pichler K. 2000 Switzerland Study about monetary risk management tools from '94 to '96. Particularly, about monetary crise from '70 to '90.
Jalilvand A. - Switzer J. 2000 Canada Study about derivatives use and different risk management tools
De Ceuster M. J. K. - Durink E. - Laveren E. - 2000 Belgium Study about derivatives use
Lodewyckx J.
Mallin C. - Ow-Yong K. - Reynolds M. 2001 United Kingdom Study about derivatives use and comparison with American studies by Bodnar, Hayt and Marston (1995).
Bodnar G. M. - de Jong A. - Macrae V. 2003 Netherlands Study about derivatives use conditioned by institutional rules and comparison with Wharton Survey in 1998
El-Masry A. 2003 United Kingdom Study about derivatives use in risk management activity (interest rate risk, exchange risk and commodity risk)
Pramborg B. 2005 Sweden and Korea Comparison among the Sweden and Korean exchange risk management activity.
Judge A. 2006 United Kingdom Study conduced by survey and annual report about the different hedger theories and the derivatives usage
Anand M. - Kaushik K. P. 2007 India Study about derivatives use in exchange risk management activity.
Servaes H. - Tufano P. 2007 Global Study about financial function, capital structure, debt structure, liquidity, options and risk management activity

Authors Year Typologies of Societies Sample size Answers' Answers' rate
number
Block S. B. - Gallagher T. J. 1986 Fortune 500 companies. 500 193 38.60%
Dolde W. 1993 Fortune 500 companies. 500 244 48.80%
Berkman H. - Bradbury M. E. 1996 New Zealand’s enterprises listed in the New Zealand Stock 166 55 33.13%
Exchange
Hakkarainen A. - Kasanen E. - Puttonen V. 1997 Last 100 largest Finnish non-financial firms. 100 84 84.00%
Berkman H. - Bradbury M. E. - Magan S. 1997 New Zealand’s enterprises listed in the New Zealand Stock 124 79 63.71%
Exchange (NZSE).
Bodnar G. M. - Hayt G. S. - Marston R. C. 1998 2000 publicly traded firms used in 1994 and 154 non-financial 1928 399 20.70%
Fortune 500 firms added in 1995.
Alkebäck P. - Hagelin N. 1999 Swedish non-financial firms listed in the Stockholm Stock 213 163 76.53%
Exchange.
Bodnar G. M. - Gebhardt G. 1999 Non-financial societies considering greater listed companies but 368 126 34.24%
excluding the regional companies.
Jalilvand A. 1999 Canadian non-financial corporations selected from the Montreal 548 154 28.10%
Exchange Databases.
Fatemi A. - Glaum M. 2000 153 great non-financial firms listed on the Frankfurt Stock 153 71 46.41%
Exchange.
Loderer C. - Pichler K. 2000 Non-financial firms (165 firms listed in the Zurich Stock 330 96 29.09%
Exchange (ZSE) and 165 non-traded firms).
Jalilvand A. - Switzer J. 2000 Canadian non-financial corporations selected from the Montreal 548 154 28.10%
Exchange Databases.
De Ceuster M. J. K. - Durink E. - Laveren E. - 2000 334 large corporations (221 Coordination Centres and 123 largest 334 73 21.86%
Lodewyckx J. firms)
Mallin C. - Ow-Yong K. - Reynolds M. 2001 800 UK non-financial firms selected from Hemmington Scott’s 800 231 28.88%
Corporate Register listed LSE
Bodnar G. M. - de Jong A. - Macrae V. 2003 Non-financial societies. 167 84 50.30%
El-Masry A. 2003 401 non- financial firms listed on London Stock Exchange 401 173 43.14%
Pramborg B. 2005 250 Swedish firms listed on the Swedish Stock Exchange and 387 637 163 25.59%
Korean firms listed KSE
Judge A. 2006 500 largest UK companies listed on the London Stock Exchange. 441 186 42.18%
Anand M. - Kaushik K. P. 2007 640 companies, which were common across S&P CNX 500 and 640 55 8.59%
BSE 500 firms
Servaes H. - Tufano P. 2007 Listed and not listed societies. Particularly: conglomerates, 334
industrial firms and utilities.

ANNEX 2 - SURVEY OF RISK MANAGEMENT BY ITALIAN NON-FINANCIAL FIRMS
1. Please indicate whether your firm manages risks in the following areas, whether your risk management strategy involves the use of derivative financial instruments (forwards, futures, options,
swaps, or contracts including these instruments) or insurance products and indicate how the intensity of derivatives/insurance usage has changed over the past 2 years: (Check appropriate
boxes in each column)
Foreign Other
Interest Rates Energy Equity Credit Operational
Risk Area Exchange Commodities Geopolitical
(IR) (EN) (EQ) (CR) (OR)
(FX) (CM) (GP)
Firm faces risk
Firm manages risk
Uses derivative contracts
Uses insurance contracts
Intensity of derivative usage

↑ ↓ → ↑ ↓ → ↑ ↓ → ↑ ↓ → ↑ ↓ → ↑ ↓ → ↑ ↓ → ↑ ↓ →
relative to 1999
Intensity of insurance usage

↑ ↓ → ↑ ↓ → ↑ ↓ → ↑ ↓ → ↑ ↓ → ↑ ↓ → ↑ ↓ → ↑ ↓ →
relative to 1999
2. Please indicate the importance to your firm of the following potential benefits of your financial risk management strategy. (check category that applies for each reason)
Not
Potential Benefits of Financial Risk Management Strategy Very Important Important N/A
Important
a. Increases reported earnings predictability
b. Reduces operating cash flow volatility
c. Decreases volatility of firm value
d. Avoids losses from large price movements
e. Increases the firm’s expected future cash flows
f. Improve the firm’s credit ratings / borrowing rate
g. Reduces the firm’s cost of equity
h. Owners expect us to manage risk
i. Other (describe: _____________________________)
2a. From the list above, indicate the most important benefit to your firm (use the heading letter) _____
41
3. Indicate your degree of concern about the following issues with respect to financial risk management derivatives contracts. (Please indicate your degree of concern with each issue by
checking the appropriate box in each column.)
No Concern Low Moderate High

a. Accounting treatment
b. Credit risk of counterparty
c. Market risk (unforeseen change in market value of derivative)
d. Monitoring and evaluating hedge results
e. Reactions by stakeholders
f. Disclosure requirements
g. Secondary market liquidity (ability to unwind transactions)
h. Other high concern issues about derivatives _________________________ _
4. Indicate the three issues of greatest concern to your firm from the list in question 3. (Use the letter in front of the instrument in the list above; list in decreasing order of importance)
_____ _____ _____
5. What has been the impact on your firm of the rules on derivatives accounting (IAS No 32 and 39)?
(Please check all that apply)
No effect on derivatives use or risk management strategy
A reduction in the use of derivatives
An increase in the use of derivatives
A change in the types of instruments used
Alter the timing of hedging transactions
A significant change in the firm’s overall strategy or approach to risk management
Foreign Exchange (FX) Risk Management
6. Given the extent to which your firm faces FX risk, if the value of the EUR were to drop 10% against all foreign currencies, what would you expect to happen to the value of your firm?
decrease 5% or more decrease less than 5% no change increase less than 5% increase 5% or more
7. What percentage of your firm’s consolidated revenues and costs are based in foreign currencies?
Revenues: 0% 5-10% 10-20% 20-30% 30-40% 40-50% 50-60% 60%+
Costs 0% 5-10% 10-20% 20-30% 30-40% 40-50% 50-60% 60%+
IF YOUR FIRM DOES NOT MANAGE FX RISK, PLEASE SKIP AHEAD TO QUESTION XX.
42
8. What percentage of the following classes of FX exposure does your firm typically hedge?
(Please check boxes that apply. Choose ‘N/A’ if your firm does not face a particular FX exposure.)
Exposure \ Percent typically hedged with derivatives 0% 1-25% 26–50% 51–75% 76–100% N/A
Foreign repatriations (e.g., dividends, royalties)
Contractual commitments
i. on-balance sheet transactions (accounts receivable/payable)
ii. off-balance sheet transactions (pending contracts)

Anticipated transactions within one year
Anticipated transactions in more than one year
Operating/competitive exposure
Translation of foreign subsidiary financial statements
Other ________________________________________
9. How is FX risk management carried out in your firm? (check only best description)
By each exposure separately as they arise within each line of business / division ........................................................................................................
By netting within separate classes of exposure within each line of business / division ...............................................................................................
By pooling/netting across classes of exposures within each line of business / division ...............................................................................................
By each separate class of net exposures pooling across many lines of business / divisions .........................................................................................
By pooling/netting across classes of exposures and pooling across lines of business / divisions .................................................................................
10. What type of instruments does your firm use to manage FX risk? (check all that apply)
a. Forward contracts ......................................................................... b. Money market contracts and spot FX ..........................................
c. Futures contracts........................................................................... d. Non deliverable forwards (NDFs) ...............................................
e. OTC options ................................................................................. f. Exchange traded options...............................................................
g. Option combinations (e.g., collars, straddles).............................. h. Currency swaps ............................................................................
i. Foreign currency debt financing ................................................. j. Other __________________________........................................
10a. From the list above, identify the 3 instruments most commonly used by your firm. (Use the letter in front of the instrument in the list above; list in decreasing order of importance) _____
_____ _____
11. What percent of your total FX derivatives (by notional value of contracts) have the following original maturities:
Please enter the approximate % of currency derivatives at each original maturity; percentages should sum to 100%
≤ 90 days 91 – 180 days 181 - 365 days 1 yr – 3 yrs 3 yrs +
Percentage of derivatives with maturity of
43
12. What benchmark does your firm use when evaluating the effectiveness of your FX risk management strategy?
(select all that apply)
Beginning of period forward rates A pre-defined percentage-hedged benchmark
Beginning of period spot rates Exchange rates from previous period (quarter or year)
Forecast variance analysis Forecasted variance R – risk adjusted basis
Other ________________________________ Our firm does not use a benchmark
13. Does the fact that the EUR is becoming a reserve currency affect how much you hedge FX? Yes No
14. How often does your market view of exchange rates cause you to ...
Frequently Sometimes Never
Alter the timing of hedges
Alter the size of hedges
Actively take positions in currency derivatives
Interest Rate Risk Management
15. In the past two years, how often has your firm transacted in the interest rate derivatives market to...
(Please check the appropriate responses. Choose ‘Not Applicable’ if a reason is not relevant to your firm.)
Infrequently Occasionally Frequently Not Applicable
Swap from fixed rate to floating rate
Swap from floating rate to fixed rate
Fix in advance the rate or spread on new debt
Reduce or lock in rates based upon a market view
16. What types of interest rate contracts/positions does your firm use to manage IR risk? (check all that apply)
a. Forward rate agreements (FRAs) b. Interest rate futures
c. Interest rate swaps d. Interest rate swaptions
e. OTC IR options f. Exchange traded IR option contracts
g. Option combinations (e.g., collars, straddles) h. Varying the maturity of the debt
i. Other ___________________________________________________________________________
_____ _____
44
17. Which statement(s) best describes the benchmark your firm uses for evaluating the IR risk management of your firm’s debt portfolio? (Please check all that apply)
Cost of funds relative to target portfolio Volatility of interest cost relative to a target portfolio
Cost of funds relative to an index (e.g. LIBOR) Cost of funds relative to a target duration portfolio
Other benchmark _______________________ Our firm does not use a benchmark
18. Does an inverted yield curve impact the size or amount of your interest rate hedge positions?
Yes No
Energy (EN) / Commodity (CM) Price Risk Management
19. How many different types of energy price and commodity price exposures does your firm evaluate/manage?
(check one for each category)
Energy (fuel/electricity): 0 1 2+ Commodities (agricultural/non-oil primary products) 0 1 2+
20. What type of contracts do most commonly use to manage energy / commodity price risk? (check all that apply)
a. Forward contracts b. Futures contracts
c. Fixed pricing contracts d. OTC options
e. Exchange traded option contracts f. Option combinations (e.g., collars, straddles)
g. Debt contracts with embedded options h. Swaps
j. Other __________________________ j. Our firm does not use CM or EN contracts
_____ _____
Credit Risk Management
21. Which of the following credit exposures does your firm face? (check all that apply)
Accounts receivable from customers Long term contracts with customers
Long term contracts with suppliers Loans to vendors
Counterparties on financial derivatives Corporate bonds in an investment portfolio
Other _______________________________
45
22. What methods does your firm use to manage any credit risk exposure (check all that apply)
Minimum credit rating for counterparties Strict caps on exposure to any single party
Collateral or loan guarantees (cosigning) Credit insurance
Credit default swaps Total return swaps
Other (describe) _______________________________________________________
23. Has the advent and use of credit default swaps and other credit derivatives in the market….
…had a positive effect on your firm’s credit spread
…had a detrimental effect on your firm’s credit spread
…had no effect on your firm’s credit spread
IF YOUR FIRM DOES NOT MANAGE GEOPOLITICAL RISK, PLEASE SKIP AHEAD TO QUESTION 29
Geopolitical Risk
24. How widely does your firm evaluate geopolitical risks? (check best answer for each line )
For investments… over a certain size of any size
For investments … in certain foreign countries in all foreign countries in all foreign countries and at home
25. After the following events, how has the role of geo-political risk management changed at your firm?
much less less about the more much more
emphasis emphasis same emphasis emphasis
New York, September 2001
Madrid, March 2004
London, July 2005
46
26. Check the methods that your firms uses to deal with geopolitical risk: (check all that apply)
a. political risk insurance b. avoid investments in certain countries
c. decrease size of investments in risky countries d. increase use of partners or consortia
e. increase research before new investment f. increase use of political risk analysts
g. increase use of security personnel h. alter supply chain management
i. diversify investments over more industries j. diversify investments across more countries
k. lower company profile in risky regions l. enhance public relations in risky regions
m. increased use of currency/commodity hedging n. Other __________________________
26a. From the list above, identify the 3 approaches most commonly used by your firm. (Use the letter in front of the method in the list above; please list in decreasing order of importance)
_____ _____ _____
27. When valuing investment projects with significant political risk, how does your firm incorporate the political risk into the decision? (check answer that applies)
add risk premium to the required rate of return use risk-adjusted expected cash flows
simulation analysis price in risk insurance costs
other (describe) ____________________________
28. Does your firm currently hold any political risk insurance contracts? Yes No
Operational Risk
29. Does your firm evaluate operational risk for any of its processes? Yes No
30. After the black-out in Italy in March 2003, how has the role of operational risk management changed at your firm?
much less emphasis less emphasis about the same more emphasis much more emphasis
31. Does your firm use the following dataset?

Internal External Simulation
High Frequency Low Impact
Low Frequency High Impact
32. Check the type of contracts most commonly used to manage operational risk?
Insurance Contracts Alternative Risk Transfer Contracts
First loss to happen put Operational Risk Swap
Cat bond Cat options
47
IV. Option Contracts
33. Please indicate which of the following types of option contracts your firm has used in the past 12 months for the indicated exposures. (Check the appropriate column for each row)
Types of Exposure
Foreign Exchange Interest rate Commodity
Standard European-style options
Standard American-style options
Average rate (price) options
Basket options (options of weighted average prices)
Barrier options (knock-in/knock-out)
Contingent premium (options with deferred or conditional premiums)
Option combinations (i.e. collars, straddles, etc.)
Other ____________________________
48
33a. If your firm does not use options, please provide the main reason why?
________________________________________________________________________________
Control and Reporting Procedures
34. Does your firm have a formal documented risk management policy with respect to the use of derivatives? (Please circle the appropriate response)
Yes No
35. Does your firm have a regular schedule for reviewing and reporting on is risk management strategy?
No Yes If yes, what is the frequency? ____________________ (i.e., weekly, monthly, quarterly, etc.)
36. If your firm announced that it was completely abandoning its current risk management program, what do you think would be the impact on your firm’s value?
no impact increase ________% decrease ________%
37. What is the lowest rated counterparty with which you will enter a derivatives transaction?
(Please circle the number under the appropriate response.)
AAA AA A BBB < BBB No Policy Don’t Know
Maturities 12 months or less...............................................
Maturities more than 12 months .........................................
38. How frequently do you value your derivatives portfolio? (Please circle the appropriate response.)
Daily Quarterly
Weekly Annually
Monthly As needed/No set schedule
39. Rank your degree of reliance on each of the following for valuing your derivative positions.
(Please rank items; 1 - Most important, .., 4 - Least important; Use an “X” if a method is not used at all.)
Rank
Dealer that originated the transaction _____
Another dealer, consultant, or price vendor (e.g. Bloomberg) _____
Internal source (e.g. software, spreadsheet, etc) _____
40. How do you evaluate the risk management function? (circle the statement that best matches your practice)
Reduced volatility relative to a benchmark
Increased profit (reduced costs) relative to a benchmark
Absolute profit/loss
Risk adjusted performance (profits or savings adjusted for volatility)
49
Non Risk Managers
41. If you do not manage risk any in one or more of these risk areas, please indicate the most important factor(s) for not using them. (Check all that apply in columns where you do not use
derivatives/insurance)
Foreign exchange
Geo-political
Commodities
Interest rate
Operational
CM Other
Energy
OR
EQ
CR
GP
EN
FX
IR
Reason \ Risk area
Equity
Credit
Insufficient exposure to risk area to warrant management
Exposure more effectively managed by other means
Financial reporting requirements for risk management activities
Difficulties in monitoring/measuring contract effectiveness
Concerns about external perception of derivative/insurance use
Costs of risk management greater than benefits
Expect price (events) to move in our favor
Shareholders expect us to not manage risk
Uncertainty about timing/size of exposures
Other ________________________________________
50
Demographic Information
D1. Please check one from each category that best describes your company:
a. Industry b. Sales Revenue (EUR) c. Number of Employees d. Headquarters e. Ownership
Retail/Wholesale Less than € 25 million Fewer than 100 ____ Northeast Public, MIB
Mining/Construction € 25-99 million 100-499 ____ Northwest ____ Public, other Exchange
Manufacturing € 100-499 million 500-999 ____ Centre ____ Private
Transportation/Energy € 500-999 million 1000-2499 ____ South and Islands ____ Government
Communications/Media € 1 - 4.9 billion 2500-4999 ____ Nonprofit
____ Tech (Software/Biotech) Over € 5 billion 5000-9999
Banking/Finance/Insurance Over 10,000
____ Service/Consulting
____ Health care
Other __________________
D2. Please fill in the blanks or check the correct box:

My company’s total debt/total assets ratio is approximately __________ (e.g., 10% 35% etc)
During the last year, the consolidated firm made a profit: True False (check one)
My company’s growth rate in sales revenue over the last 3 years has averaged _______% (e.g., -4%, 5%)
My company is approximately ____________ years old
For traded companies

My company’s Price/Earnings ratio over the last 3 years has averaged _______ (e.g., 18, n/a)
The current price of our common stock is €________ (e.g., €6,21)
D3. Please check one square from each category that best describes your CFO or equivalent:
Age time in job Highest completed Education

≤39 <4 years High School MBA
40-49 4-9 years Some university non-MBA masters
50-59 ≥10 years University degree >Masters degree
 ≥60
D4. On a fully diluted basis, what percentage of your common stock is owned by corporate insiders?
 <5% 5-10% 11-20% >20%
D5 On average, what approximate target percentage of your total compensation is in the form of …
(Please answer all categories)
51
_____% stock and option compensation (e.g., 10%, 80%)
_____% bonus
_____% salary
_____% Other _________
D6. What is your job title? ___________________________
52
WORKING PAPER PUBBLICATI DA CAREFIN
1/08 La stima del capitale economico a fronte del

portafoglio crediti: un’introduzione alle
nuove metodologie
2/08 Imperfect Predictability and Mutual Fund
Dynamics: How Managers Use Predictors in
Changing the Systematic Risk
3/08 Il sistema dualistico per la governance di
banche e assicurazioni
4/08 Precautionary investments and vertical
externalities: the role of private insurers in
intergovernmental relations
5/08 I derivati climatici per il settore vitivinicolo
6/08 Market discipline in the banking industry.
Evidence from spread dispersion
7/08 A Survey on Risk Management and Usage
of Derivatives by Non-Financial Italian
Firms
I working papers di Carefin, Centre for Applied Research in Finance dell’Università
Bocconi, sono realizzati grazie alle seguenti istituzioni
ALETTI GESTIELLE
DELOITTE CONSULTING
ALLIANZ S.p.A.
EURIZON CAPITAL SGR
ARCA ASSICURAZIONI
EURIZON VITA
ARCA SGR
FONCHIM
ASSICURAZIONI GENERALI
GENERALI INVESTMENTS ITALY
AVIVA VITA
INTESA SANPAOLO
AXA I. M. ITALIA SIM S.p.A.
INTESA VITA
AXA MPS ASSICURAZIONI VITA
MEDIOLANUM VITA
BANCA CARIGE
PIONEER INVESTMENTS
BANCA MONTE DEI PASCHI DI SIENA MANAGEMENT
BANCA POPOLARE DI MILANO SWISS RE
BANCASSURANCE POPOLARI UBI ASSICURAZIONI
BNL VITA UNIPOL GRUPPO FINANZIARIO
CARIGE AM SGR UNIQA GROUP
CATTOLICA ASSICURAZIONI SOC. COOP. VENETO BANCA
CNP UNICREDIT VITA
Copyright
Carefin, Università Bocconi
copertina_carefin.qxp 10/01/2008 15.00 Pagina 2
CAREFIN CAREFIN
Centre for Applied Research in Finance Centre for Applied
Università Bocconi Research in Finance
via Roentgen 1
I-20136 Milano
tel. +39 025836.5908/07/06
fax +39 025836.5921
carefin@unibocconi.it
www.carefin.unibocconi.it
CAREFIN
Working Paper
Luigi Bocconi
Università Commerciale
CAREFIN
WP

A Survey On Risk Management - Very IMP

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and Usage of Derivatives by

Electronic copy available at: http://ssrn.com/abstract=1305033

2. A REVIEW OF PREVIOUS SURVEYS 2

3. SURVEY METHODOLOGY AND SAMPLE 11

4. DERIVATIVES OR INSURANCE INSTRUMENTS’ USAGE AND

5. DERIVATIVES USAGE CONDITIONAL ON SIZE AND ACTIVITY 16

6. EXPECTED BENEFITS FROM RISK MANAGEMENT ACTIVITY 18

7. CONCERNS ABOUT DERIVATIVES USAGE 20

8. THE RISK MANAGEMENT ACTIVITY IS BEEN INFLUENCED

9. INTEREST RATE RISK MANAGEMENT 31

10. ENERGY AND COMMODITY DERIVATIVES USAGE 32

11. OPERATIONAL RISK MANAGEMENT 34

ANNEX 1 – PREVIOUS SURVEYS 39

CAREFIN WORKING PAPER I

Electronic copy available at: http://ssrn.com/abstract=1305033

1. Insufficient exposure to risk area to warrant management;

CAREFIN WORKING PAPER II

CAREFIN WORKING PAPER 1

CAREFIN WORKING PAPER 2

CAREFIN WORKING PAPER 3

CAREFIN WORKING PAPER 4

CAREFIN WORKING PAPER 5

CAREFIN WORKING PAPER 6

CAREFIN WORKING PAPER 7

22 With a minimum 1997 sales volume of DM 400 million, as discriminatory criteria.

CAREFIN WORKING PAPER 8

26 Utilities were excluded in both countries.

CAREFIN WORKING PAPER 9

29 Namely S&P CNX 500 and BSE 500 firms.

CAREFIN WORKING PAPER 10

CAREFIN WORKING PAPER 11

CAREFIN WORKING PAPER 12

CAREFIN WORKING PAPER 13

CAREFIN WORKING PAPER 14

Exchange-foreign 2,33% 2,33% 11,28% 23,26% 18,60% 23,26%

CAREFIN WORKING PAPER 15

Derivatives Usage Response Rates By Size

CAREFIN WORKING PAPER 16

CAREFIN WORKING PAPER 17

CAREFIN WORKING PAPER 18

Most important benefit

Reduces operating cash flow volatility 28,21%

Increases reported earnings predictability 12,82%

Shareholders expect us to manage risk 7,69%

Decreases volatility of share price 2,56%

Increases the firm’s expected future cash flow s 2,56%

Reduces the firm’s cost of equity 2,56%

Improve the firm’s credit ratings

CAREFIN WORKING PAPER 19

Degree of Concerns about some Issues

Reaction by analysts or investors 7,50%

0,00% 5,00% 10,00% 15,00% 20,00% 25,00% 30,00% 35,00% 40,00%

CAREFIN WORKING PAPER 20

CAREFIN WORKING PAPER 21

FOREX Risk - Currency Exposure

CAREFIN WORKING PAPER 22

FOREX Risk - Transactions in Derivatives Markets and Typology of Risk

CAREFIN WORKING PAPER 23

Foreign 42,86% 7,14% 0,00% 3,57% 3,57% 42,86%

CAREFIN WORKING PAPER 24

Typologies of Implemantation of FX Risk Management