Horror stories about derivatives losses by corporations that speculated in the markets are the exception to the rule, according to a survey of 200 of Bank America Corp.'s derivatives clients.
Bank America found that its clients' foreign exchange activities are conservatively managed, with 90% reporting that they have put centralized risk-management operations into place.
Only 5% of the respondents said their risk-management areas are used as profit centers, the survey found.
"That makes a lot of sense," said Steve Godfrey, a foreign currency strategist at Bank of America. "Each hedging situation is unique. People tend to gravitate toward centralization."
Bank Seeks to Tailor Products
Mr. Godfrey said the survey, which will be undertaken annually, was conducted to help the bank better tailor its products for clients.
The survey found that 90% of the respondents manage transaction exposure -- or the possibility of a change in the company's financial position because of normal business activities. Forty percent manage translation exposure -- the possibility of losing money because of fluctuations in foreign currency rates. And 40% manage economic exposure -- the possibility of loss because of changing market conditions.
Of the responding corporations, 80% said they have the capability of employing options as a hedge. The majority use simple hedges such as puts, calls, forwards, and combinations.
Only one of four respondents said they use exotic options, as opposed to more traditional hedges.
"The more exotic options would be barrier options, average-rate options, and binary options," explained Mr. Godfrey. "Clients are generally pretty sophisticated."
He added that barrier options are one of the more popular exotic hedges used by many of the bank's corporate clients. "But the more they are used, the more they become traditional," said Mr. Godfrey.
The survey also found that 80% of the corporations have at least a 50% hedge, 29% are fully hedged, and 7% have no hedge.
"Our customers are familiar with the products," pointed out Mr. Godfrey. "For many of them, a no hedge policy fits into their particular situation. It's not because they don't understand it."
Separately, a survey released this week by Veribanc, a Wakefield, Mass., firm, found that of 11,457 banks operating in the United States as of the end of the first quarter, 713 maintained positions in derivatives, totaling $13.9 trillion.
Data Compiled from Fed
The information was compiled from Federal Reserve Bank call report data.
Replacement cost exposure exceeded $15.5 billion in the first quarter. Of the 375 banks reporting replacement cost exposure on interest rates and foreign exchange contracts, 41 institutions have more than 10% of equity at risk.
A dozen banks have more than half their equity at risk. These banks account for 23% of the banking industry's assets, the Veribanc study noted.