A Survey on Risk Management and Derivative Usage in Italian Non-Financial Firms

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: Insufficient exposure to risk area to warrant management; Exposure more effectively managed by other means: Difficulties in monitoring/measuring contract effectiveness.