1998 Wharton survey of financial risk management by US non-financial firms.This is the third in a series of surveys on financial risk management practice and derivatives derivatives
In finance, contracts whose value is derived from another asset, which can include stocks, bonds, currencies, interest rates, commodities, and related indexes. Purchasers of derivatives are essentially wagering on the future performance of that asset. use by nonfinancial Adj. 1. nonfinancial - not involving financial matters
financial, fiscal - involving financial matters; "fiscal responsibility" corporations in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. undertaken by the Weiss Center for International Financial Research of the Wharton School and CIBC World Markets CIBC World Markets is the investment banking division of the Canadian Imperial Bank of Commerce. It helps governments, large companies, and other large institutions obtain capital and credit and is a primary dealer in U.S. Treasury securities. . The results of the two earlier surveys, carried out in 1994 and 1995, are published in Financial Management and have been widely cited in the business and academic press.(1) The 1998 survey, again sponsored by CIBC World Markets, extends the previous two surveys by asking new questions about certain aspects of derivatives use and risk management practice. This report provides a summary of the responses to the questions on the 1998 survey both in total and, when responses differ, conditional Subject to change; dependent upon or granted based on the occurrence of a future, uncertain event.
A conditional payment is the payment of a debt or obligation contingent upon the performance of a certain specified act. on size and industrial sector. In addition, where appropriate, current responses are compared with responses to similar questions on previous surveys. However, caution is required in interpreting some of those comparisons as some differences may result simply from changes in the set of responding firms. A copy of the questionnaire questionnaire,
n a series of questions used to gather information.
n a form usually filled out by patients that provides data concerning their dental and general health. with the response tallies TALLIES, evidence. The parts of a piece of wood out in two, which persons use to denote the quantity of goods supplied by one to the other. Poth. Obl. pt. 4, c. 1, art. 2, Sec. 7. is displayed in the Appendix.
As with the previous surveys, one of the primary objectives of this survey is the development of a database on risk management practices suitable for academic research. The survey results can be linked with industry and firm-specific characteristics of the respondents In the context of marketing research, a representative sample drawn from a larger population of people from whom information is collected and used to develop or confirm marketing strategy. to allow economic analysis of the responses. However, as in the past, the firm-specific responses are confidential and known only to the researchers at Wharton.
I. Use of Derivatives
This section relays the results of the derivatives-use portion of the 1998 survey.
A. Sample Firms and Overall Derivatives Usage
The six-page questionnaire was mailed in October October: see month. 1997 to the same basic sample of firms used in the 1994 and 1995 surveys. The sample consists of the original randomly selected 2,000 publicly traded firms used in 1994 plus the remaining 154 non-financial Fortune 500 firms added in 1995. Due to mergers, buyouts, and bankruptcies since 1994, this sample currently consists of 1,928 firms. A second mailing of the questionnaire was done in March 1998. Of the firms surveyed, 399 returned a completed survey, yielding a response rate of 20.7%. Of these firms, 197 are from the manufacturing sector; 82 are from the primary-products sector, which includes agriculture, mining, energy, as well as utilities; and 120 are from the service sector. In terms of size, 160 firms are from the large category, consisting of firms with fiscal year 1996 total sales greater than $1.2 billion, 116 are from the medium-sized Me´di`um-sized`
a. 1. Having a medium size; as, a medium-sized man s>.
Adj. 1. medium-sized - intermediate in size
medium-size, moderate-size, moderate-sized category, with total sales between $1.2b and $150m, and 123 are from the small category, with total sales less than $150m.(2)
The first question in the survey asks firms whether they use derivatives. Of the firms, 200, or 50%, report using derivatives. Table 1 displays the breakdown of the first question. In the "Full Sample" row of Table 1, we compare this usage rate with that of the previous two surveys. The results suggest that the percentage of responding firms using derivatives has increased each year. However, this increase over time may be a combination of the change in the sample in 1995 and/or and/or
Used to indicate that either or both of the items connected by it are involved.
Usage Note: And/or is widely used in legal and business writing. variation in response composition. A better way to compare derivatives use over time is to compare the response of the same set of firms. In the second row of Table 1, we report the usage percentages for the 58 firms that responded to all three surveys. Interestingly, in all three years the percentage of derivatives users from this group is 41%, although several firms switch between use and non-use across years. Because of the limited number of firms that responded to all three surveys, we also report the usage percentages for the 171 firms that responded to both the 1994 and the 1998 surveys. These percentages, reported in the bottom row of Table 1, are also the same in both years at 44%. Overall, these results suggest that the percentage of firms using derivatives has remained constant over the past three years.
B. Change in Usage Intensity
While the evidence suggests that the percentage of firms using derivatives has not changed noticeably no·tice·a·ble
1. Evident; observable: noticeable changes in temperature; a noticeable lack of friendliness.
2. Worthy of notice; significant. , we were interested in determining whether there was any change in the intensity of usage among the firms that use derivatives. To consider this, Question 2 asks the derivative derivative: see calculus.
In mathematics, a fundamental concept of differential calculus representing the instantaneous rate of change of a function. using firms to indicate how their derivative usage in the current year compared to usage in the previous year (based upon the notional value Notional Value
The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets because in them a very little amount of invested money can control a large position (have a large consequence for the trader). of total contracts). Figure 1 displays the response to this question. Of derivative users, 42% indicated that their usage had increased over the previous year, compared to just 13% who indicated a decrease. The remaining firms indicated that their usage had remained constant. Overall, these responses suggest that a significant proportion of derivatives users is finding derivatives helpful enough that they are choosing to increase their usage.
Table 1. Comparison of Derivative Usage Across Surveys Percentage of Respondents Year of Using Survey Derivatives This Survey 1998 50% Previous Years' 1995 41% Surveys 1994 35% Firms Responding to 1998 41% All Three Surveys 1995 41% (58 Firms) 1994 41% Finns Responding in 1998 44% Both 1994 & 1998 1994 44% (171 Firms)
C. Derivatives Usage Conditional on Size and Activity
Figure 2 presents the percentage of current derivatives users broken down by size group and industrial sector. In the size dimension, usage is heaviest among large firms at 83%. The derivative usage rate drops to 45% for medium-sized firms and to 12% for small firms. That large firms are so much more likely to use derivatives is suggestive of suggestive of Decision making adjective Referring to a pattern by LM or imaging, that the interpreter associates with a particular–usually malignant lesion. See Aunt Millie approach, Defensive medicine. an economies-to-scale argument for derivative use, with large firms better able to bear the fixed cost of derivatives use compared to small firms. In the industrial dimension, derivatives usage is greatest among primary product producers at 68%. Given that futures exchanges This is a list of futures exchanges. Those stock exchanges that also offer trading in futures contracts besides trading in securities are listed both here and the list of stock exchanges. were originally established to help manage commodity risks, it is not surprising that such a large percentage of primary product producers use derivatives. Among manufacturing firms, 48% use derivatives; much of this usage is likely driven by foreign currency exposure arising from foreign operations or exporting/importing. Even among service firms, 42% use derivatives, most likely because of the increased internationalization The support for monetary values, time and date for countries around the world. It also embraces the use of native characters and symbols in the different alphabets. See localization, i18n, Unicode and IDN.
internationalization - internationalisation of service firms and the growing need to manage foreign currency exposure.
The change in derivatives usage also varies across these groupings. Service firms are nearly twice as likely to have increased derivatives usage than manufacturing or primary-product firms. Also, not a single small firm indicated that it had decreased its derivatives usage over the previous year. These responses suggest that the usage rate is increasing most among groups where overall derivatives usage is least common.
D. Approach to Risk Management Across Risk Classes
Financial price risk can be classified into four broad classes: foreign-currency, interest-rate, commodity, and equity risk. We were interested in the percentage of firms that used derivatives to manage risk in each of these four classes. The responses to this question are displayed as the white bars in Figure 3. The figure reveals that of the firms using derivatives, foreign-exchange (FX) risk is the risk most commonly managed with derivatives, being done so by 83% of all derivatives users. Interest-rate (IR) risk is the next most commonly managed risk with 76% of firms indicating IR derivatives use. Commodity (CM) risk is managed with derivatives by 56% of derivatives users, while equity (EQ) risk is the least commonly managed risk at just 34%.(3) It should be noted that unlike EQ risk and IR risk, which are likely to be faced by all firms, some firms will not directly face FX and CM risk because of the nature of their activities. Consequently, the usage of derivatives in these classes, conditional on having an exposure, will be even higher than the numbers displayed in the figure.
The responses to this question conditional on industry display an interesting pattern. Among primary-product firms, commodity risk is the most commonly managed risk with 79% of these firms indicating CM derivatives use. FX risk is most commonly managed by manufacturing firms, with 95% of this group indicating FX derivatives use. For service firms, IR risk was slightly more commonly managed with derivatives than FX risk, with derivatives usage rates of 78% versus 72%, respectively. Service firms managed equity risk least frequently with only 22% indicating EQ derivatives use.
Because of the different nature of these risk classes and the fact that they are often managed separately within firms, we also asked the firms to indicate their approach, in terms of decision-making decision-making,
n the process of coming to a conclusion or making a judgment.
n a type of informal decision-making that combines clinical expertise, patient concerns, and evidence gathered from structure, to managing each class of risk. We allowed firms to choose between 1) risk-management activities being primarily centralized cen·tral·ize
v. cen·tral·ized, cen·tral·iz·ing, cen·tral·iz·es
1. To draw into or toward a center; consolidate.
2. , 2) risk-management decisions primarily decentralized de·cen·tral·ize
v. de·cen·tral·ized, de·cen·tral·iz·ing, de·cen·tral·iz·es
1. To distribute the administrative functions or powers of (a central authority) among several local authorities. with centralized coordination coordination /co·or·di·na·tion/ (ko-or?di-na´shun) the harmonious functioning of interrelated organs and parts.
1. The harmonious adjustment or interaction of parts. , or 3) risk-management activities primarily decentralized. The responses to this inquiry are also shown in Figure 3 as the multicolored bars under each risk class. As shown, centralized risk-management activities are overwhelmingly most common, with the only exception being commodity risk management where one-third of the firms indicated some degree of decentralized structure.
E. Concerns About Derivatives Usage
The use of derivatives in today's market involves many issues. Question 4a asks 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, Security and Exchange Commission (SEC) disclosure requirements, and secondary market liquidity (ability to unwind Unwind
1. The closure of an investment position.
2. The reconciliation of an error previously unseen by a brokerage house.
1. Sometimes referred to as closing out a position. transactions). For each issue, firms are asked to indicate a high, moderate, or low level of concern 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. Figure 4 displays the responses. Given the propensity of a majority of firms to indicate a moderate level of concern with many issues, the figure displays the percentage of firms indicating a high or low degree of concern for the six issues.
Accounting treatment was the issue causing the most concern among derivatives users, with 37% of the firms indicating a high concern and only 15% low or no concern with this issue. Undoubtedly, this concern is the result of the August 1997 release by the Financial Accounting Standards Board Financial Accounting Standards Board (FASB)
Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP). (FASB FASB
See: Financial Accounting Standards Board
See Financial Accounting Standards Board (FASB). ) of a draft proposal for a new accounting standard for the measurement and reporting of derivatives. Market risk, defined as unforeseen changes in the market value of derivative positions, was the next issue most troubling firms, with 31% of the firms indicating a high degree of concern and 27% of the firms indicating little or no concern. This was followed closely by monitoring and evaluating hedge results with 29% of the firms indicating a high degree of concern but 26% indicating little or no concern. The remaining four issues had significantly more firms indicating little or no concern as compared to high concern. In the case of credit risk, secondary market liquidity, and reaction by analysts and investors, more than 35% of the firms indicated low or no concern with these issues. For credit risk, this result contrasts markedly with the 1995 survey in which it was the issue causing the most serious concern among derivative users. Among the "other issues" that some firms indicated high concern about were transaction costs Transaction Costs
Costs incurred when buying or selling securities. These include brokers' commissions and spreads (the difference between the price the dealer paid for a security and the price they can sell it). and unauthorized trading.
We also asked firms to indicate their most serious concern from the items listed above. The percentage of firms indicating each concern as their most serious are displayed on the right-hand right-hand
1. Of, relating to, or located on the right.
2. Relating to, designed for, or done with the right hand.
3. Most helpful or reliable: my right-hand assistant. edge of Figure 4. Interestingly, market risk came in first with 27% of the firms indicating this as their most serious concern. This was followed closely by accounting treatment with 26% of the firms ranking this as their most serious concern. Despite the large percentage of firms indicating little or no concern about credit risk, only 14% ranked this as their most serious concern, just ahead of monitoring and evaluating hedges, which was ranked the most serious concern by 13% of the firms.
F. Likely Impact of FASB's New Accounting Rules
Given the degree of concern regarding the accounting treatment of derivatives, we were interested in investigating the potential impact of the FASB's new accounting standard, Statement No. 133, "Accounting for Derivative Instruments Derivative instruments
Contracts such as options and futures whose price is derived from the price of an underlying financial asset. and Hedging Activities." This new standard, originally released in draft form in June June: see month. 1996, then modified mod·i·fy
v. mod·i·fied, mod·i·fy·ing, mod·i·fies
1. To change in form or character; alter.
2. and re-released in August 1997, and then formally issued in June 1998, requires some significant changes to the way derivatives are measured and reported in the firm's financial statements. It also provides official recognition of the use of a broader array of derivatives in hedging transactions. Roughly speaking, the new proposal requires all derivatives to be recorded on the balance sheet at fair market value and marked to market each reporting period. Changes in market value are either reported in income each period, or directly in the equity section of the balance sheet, depending on the specific use of the derivatives. The rule also essentially covers all derivatives instruments, including derivatives embedded Inserted into. See embedded system. in other securities, thus expanding the set of derivatives instruments for which accounting rules are explicitly stated.
In Question 5, we asked firms to indicate the most likely impact on their risk management activities of the FASB's new rule on derivatives accounting. Table 2 displays the results. For 73% of the firms, the new rules will have no effect on their derivatives use or their risk-management strategies. Of the 27% of the firms for which the new rules will cause some change, the most likely effect is a change in the type of instruments used, with 55% of these firms indicating this change. Other commonly mentioned effects include a reduction in the use of derivatives and a change in the timing of hedging transactions.
III. Foreign Exchange Exposure Management
This section focuses on the issue of currency exposure and its management using derivatives.
A. Currency Exposure
As shown, foreign currency derivatives are the most commonly used class of derivatives with 83% of derivative-using firms utilizing them. Before asking detailed questions on foreign currency derivatives use, we were interested in learning about the exposure of the sample firms. To do this, Question 7 asks firms to indicate their percentage of total revenues and costs in foreign currency. The responses to this question for revenues and expenses as well as net foreign currency position are displayed in Table 3.
As the table shows, a reasonable percentage of firms report either no foreign currency revenue or no foreign currency costs. On the other hand, 40% of the firms report foreign currency revenues to be 20% or more of total revenues, while 36% of the firms report foreign currency expenses to be 20% or more of total expenses. So, many firms in the survey have significant foreign currency exposure.
The fourth column of the table displays the net imbalance imbalance /im·bal·ance/ (im-bal´ans)
1. lack of balance, such as between two opposing muscles or between electrolytes in the body.
2. dysequilibrium (2). of foreign currency revenues and expenses for the firms. It is interesting that a majority of firms roughly balance out total foreign currency revenues with foreign currency expenses. Although the responses mask mask, cover or partial cover for the face or head used as a disguise or protection. Masks have been worn from time immemorial throughout the world. They are used by primitive peoples chiefly to impersonate supernatural beings or animals in religious and magical whether the expenses and revenues are in the same foreign currencies, and thus many of these balanced firms may have exposures to particular foreign currencies, this pattern suggests that natural hedging is a common way for firms to manage their exposure to exchange rates. Of the firms that report a net imbalance in total foreign currency revenues and costs, nearly twice as many firms report a net revenue exposure (26%) as report a net expense exposure (15%).
Table 2. Impact of FASB's New Rule Governing Derivatives Accounting Percentage of Firms Most Likely Impact Responding(a) No Effect on Derivatives Use or 73% Firms Risk-Management Strategy Noting FASB Effects A Reduction in the Use of 38% Derivatives An increase in the Use of 9 Derivatives A Change in the Types of 55 Instruments Used A Change in the Timing of Hedging 38 Transactions A Significant Change in the Firm's 13 Overall Approach to Risk Management a Percentages in the right column are with respect to those firms not agreeing with the first statement.
1. Imposing, depending on, or containing a condition. See Synonyms at dependent.
2. Grammar Stating, containing, or implying a condition.
3. , these revenue and expense exposures exhibit several interesting characteristics. First of all, large and medium firms are both substantially net-revenue-exposed, while the small firms are, on average, net-expense-exposed. Across industries, manufacturing and service firms are heavily revenue-exposed with more than three times as many net-revenue-exposed firms as net-expense-exposed firms. This is offset by a heavy net-expense exposure on the part of the primary-product firms.
B. Transactions in Foreign Currency Derivatives Markets The derivatives markets are the financial markets for derivatives. The market can be divided into two, that for exchange traded derivatives and that for over-the-counter derivatives.
As in the previous two surveys, firms were asked to indicate how often they transacted in the foreign currency derivatives market for hedging eight frequently cited exposures. These were contractual commitments - both on-balance-sheet (i.e., payables Payables
Related: Accounts payable and receivables Receivables
An asset designation applicable to all debts, unsettled transactions or other monetary obligations owed to a company by its debtors or customers. Receivables are recorded by a company's accountants and reported on the balance sheet, and they and include all debts owed ) and off-balance-sheet Off balance sheet usually means an asset or debt or financing activity not on the company's balance sheet. It could involve a lease or a separate subsidiary or a contingent liability such as a letter of credit. (i.e., signed contracts pending), anticipated transactions within one year, anticipated transactions beyond one year, economic/competitive exposure, translation of foreign accounting statements, and foreign repatriations. As foreign currencies may be used for financing purposes, we also asked about the frequency of transactions to arbitrage arbitrage: see foreign exchange.
Business operation involving the purchase of foreign currency, gold, financial securities, or commodities in one market and their almost simultaneous sale in another market, in order to profit from price borrowing rates across currencies. Figure 5 reports the percentage of firms who "frequently" or "sometimes" transacted in the foreign currency derivatives markets for each of these [TABULAR tab·u·lar
1. Having a plane surface; flat.
2. Organized as a table or list.
3. Calculated by means of a table.
resembling a table. DATA FOR TABLE 3 OMITTED] reasons (expressed as a percentage of firms responding to the question for which the exposure is applicable).
The figure shows that the most frequently cited motivations for transacting in the foreign currency derivatives markets are for hedging near-term near-term
Of, for, or involving a short period of time in the near future. , directly observable ob·serv·a·ble
1. Possible to observe: observable phenomena; an observable change in demeanor. See Synonyms at noticeable.
2. exposures. The most commonly hedged exposures were on-balance-sheet commitments (89% hedge frequently or sometimes), anticipated transactions expected within one year (85% hedge frequently or sometimes), and foreign repatriations (78% hedge frequently or sometimes).(4) Identifiable off-balance-sheet commitments are substantially less likely to be hedged by these firms than on-balance-sheet commitments. Anticipated transactions beyond one year are frequently hedged by 12% of the firms but sometimes hedged by 45%, suggesting that a majority of firms using foreign currency derivatives at least sometimes hedge exposures over a longer horizon. The more amorphous Unorganized or vague. A lack of structure. For example, the amorphous state of a spot on a rewritable optical disc means that the laser beam will not be reflected from it, which is in contrast to a crystalline state which will reflect light. See crystalline. and longer-term competitive exposure is hedged frequently by just 11% of the firms but sometimes by an additional 28%, which is a noticeable increase from past surveys. Hedging translation exposure was a reason for currency derivatives transactions for only a minority of the firms, with 14% doing this frequently and another 23% doing so sometimes. Finally, transacting in derivatives to hedge exposures from arbitraging interest rates across currencies was done frequently by only 5% of the firms; however, 35% of the firms indicated that they do this sometimes.
C. Hedging Intensity
Not much is known about the extent to which firms hedge their various exposures, so in this year's survey we asked firms to indicate the percentage of the perceived per·ceive
tr.v. per·ceived, per·ceiv·ing, per·ceives
1. To become aware of directly through any of the senses, especially sight or hearing.
2. To achieve understanding of; apprehend. exposure that they typically hedge across various categories of currency exposure. The responses were aggregated into four classes, firms that hedge 0-25%, 26-50%, 51-75%, and 76-100% of that particular exposure. Table 4 displays the percentage of firms that responded in each of the four groups for each of seven different categories of exposure. In each case, the percentages are taken only with respect to those responding firms that indicated in the previous question that such an exposure was applicable.
The table reveals that with the exception of three types of exposure - on-balance-sheet exposures, anticipated transactions less than one year and foreign repatriations - the majority of firms hedge less than 25% of their perceived exposures. Even for these three heavily hedged exposures, the average proportion hedged, shown in the final column of the table, is less than 50%. Only for on-balance-sheet commitments does the average percentage of the exposure hedged reach 50%. Thus, partial hedging appears to be normal practice for these firms. Even in the cases of these three types of exposures, only a third of the firms indicated that they hedged more than 75% of the total exposure. Again, these three were the more easily identifiable, near-term, transaction-based exposures. For longer-term exposures, such as anticipated transactions beyond one year and economic/competitive exposure, less than 10% of the firms indicated that they hedged as much as 75% of the perceived exposure. These results suggest that foreign currency hedging, rather than eliminating exposures, generally only reduces the exposures, but typically by less than half of the original outstanding exposure.
D. Maturity Structure of Hedging
In the 1995 survey, we learned that most firms use derivatives with short maturities. The percentage of firms using derivatives with longer maturities decreased significantly with the maturity of the derivatives; only 30% of the firms reported any use of derivatives with a tenor greater than three years. Again, we asked firms to provide some information on the maturity structure of their foreign currency hedging. Table 5 displays the results of our inquiry asking firms to indicate the percentage of their foreign currency hedging done with instruments of various original maturities.
Several things are interesting to note about Table 5. First, short-term Short-term
Any investments with a maturity of one year or less.
1. Of or relating to a gain or loss on the value of an asset that has been held less than a specified period of time. derivatives are used by a vast majority of firms. In fact, 82% of the firms utilize foreign-currency derivatives with an original maturity of 90 days or less, and 77% use foreign-currency derivatives with an original maturity of 91 to 180 days, while only 12% use foreign-currency derivatives with maturities of more than three years. Second, firms tend to concentrate most of their foreign-currency derivatives usage at the short horizon, especially 90 days or less. In fact, when we combine the responses in the first two rows, nearly one-quarter of the firms do all of their foreign-currency derivatives activity in instruments with original maturities of 180 days or less. Finally, the intensity of usage drops off dramatically with the lengthening lengthening (lengkˑ·the·ning),
n the use of various massage or muscle energy techniques to relax and stretch muscle and connective tissue. of the maturity of the derivatives. Very few firms use any instruments with maturities over one year. A small group, 7% of the firms, all large firms, concentrates their foreign-currency derivatives usage only in the long-horizon instruments. However, this is a significant reduction from the previous survey when 16% of the firms had more than half of their derivatives activity in instruments with maturities longer than one year.
E. Impact of a Market View on Foreign Currency Derivatives Use
Although financial research has suggested that it is virtually impossible to outperform Outperform
An analyst recommendation meaning a stock is expected to do slightly better than the market return.
Exact definitions vary by brokerage, but in general this rating is better than neutral and worse than buy or strong buy. the expectations of future rates embedded in the market rates, financial managers have typically found it difficult to avoid [TABULAR DATA FOR TABLE 4 OMITTED] [TABULAR DATA FOR TABLE 5 OMITTED] letting their own view of the currency market affect their risk-management activities. Just as in the previous two surveys, 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 6.
In response to the first two parts of the question, 10% of the firms indicated that their market view on exchange rates "frequently" altered either the size or the timing of the hedges that they entered into. A substantially larger number of firms occasionally incorporate their market view into their hedging decision, with 49% of the firms sometimes altering the timing of their hedges and 51% 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 firms sometimes takes into account their opinion about market conditions when choosing a risk-management strategy. A smaller, but still substantial, proportion of firms "actively take positions" based on a market view of the exchange rate. While only 6% of the firms "frequently" take positions, another 26% do so at least "sometimes." While the percentage of firms that alter the size of their hedges is similar in the previous survey, the percentage of firms that sometimes alter the timing of a hedge or sometimes actively take positions has decreased from 33% to 26%.
F. Benchmark for Evaluating Foreign Currency Risk Management
One of the new questions asked this year focuses on the benchmarks that firms use to evaluate the risk-management process. For foreign-currency risk management, we asked firms about the benchmark they use for evaluating foreign-currency risk management over the budget/planning period. Figure 7 displays the responses.
Of the firms surveyed, 44% 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. Of the firms with some benchmarking
Benchmarking (also "best practice benchmarking" or "process benchmarking") is a process used in management and particularly strategic , 42% used the forward rates, which is a simple and reasonable approach to the question. Of the responding firms with a benchmark, 24% indicated that they simply use the spot rates available at the beginning of the period. This approach is questionable on theoretical grounds as the current spot rates do not incorporate any market expectations of currency movements over the period nor do they offer rates at which any risks could actually be laid off. Of the firms with some form of benchmark, 17% use a baseline The horizontal line to which the bottoms of lowercase characters (without descenders) are aligned. See typeface.
baseline - released version percent hedged strategy. The firms indicated that the baselines for these benchmarks typically range from 50% to 100% hedged. Finally, 17% of the responding firms indicated the use of some other form of benchmark. Examples of these include comparison against fully open and fully hedged results, comparison against an average executable rate over a period, comparison against some combination of a forward and option hedge, and simple profit and loss on currency derivatives. While some of these ideas have more merit than others, it is disturbing that nearly half of the firms do not have a well-specified benchmark for evaluating whether their foreign-currency risk-management process is providing any useful service to the firm.
IV. Interest-Rate-Exposure Management
Figure 8 displays the results from our question about motivations for interest-rate derivatives transactions. Nearly all firms that use interest-rate derivatives reported using them to swap from floating-rate debt to fixed-rate debt. While only 13% of the firms indicated that they do this frequently, 83% of the firms indicated that they use interest-rate derivatives to do this sometimes. In contrast, just 60% of the firms indicated that they use interest-rate derivatives to swap from fixed-rate debt to floating-rate debt with most firms doing so only sometimes as opposed op·pose
v. op·posed, op·pos·ing, op·pos·es
1. To be in contention or conflict with: oppose the enemy force.
2. to frequently. Compared to the 1995 survey results for this question, there has been an increase in the use of floating-to-fixed swaps and a decrease in the use of fixed- to floating-rate swaps. It is interesting to speculate whether this shift in intensity is related to the general lowering of interest rates since 1995, and the resulting increased desire of firms to lock in what they perceive per·ceive
1. To become aware of directly through any of the senses, especially sight or hearing.
2. To achieve understanding of; apprehend. to be favorable fa·vor·a·ble
1. Advantageous; helpful: favorable winds.
2. Encouraging; propitious: a favorable diagnosis.
3. low rates. In addition to swapping Replacing one segment of a program in memory with another and restoring it back to the original when required. In virtual memory systems, it is called "paging."
swapping - swap existing debt, interest-rate derivatives are used by a majority of firms to fix the rate or spread on new or forthcoming debt issues as well as to take positions to reduce costs based upon a market view. While less than 10% of the firms frequently use interest-rate derivatives to take these actions, approximately ap·prox·i·mate
1. Almost exact or correct: the approximate time of the accident.
2. half of the interest-rate-derivatives using firms do so sometimes. These frequencies are very similar to those reported in the previous surveys. Lastly, it is interesting to note that the percentages of firms reporting that they "frequently" use interest-rate derivatives for various reasons are lower than in the foreign currency case. This is probably because interest-rate derivatives transactions are large and infrequent in·fre·quent
1. Not occurring regularly; occasional or rare: an infrequent guest.
2. , as they are typically associated with debt issuance, whereas most foreign-currency derivatives use is transaction-based, and these transactions occur more frequently than debt issuance.
We also asked firms a similar question about whether their market view on interest rates causes them to alter their interest-rate derivatives usage. Figure 9 displays the responses. The responses are quite similar to those for the impact of a view on the foreign-exchange market. Of the firms, 66% indicated that their view on interest rates causes them to alter the timing of a transaction, 60% of the firms doing so sometimes and just 6% doing so frequently. A slightly smaller percentage, 59%, responded that their view affected the size of their derivatives transaction, again with the majority, 54%, doing so sometimes. Additionally, 41% of the firms indicated that their view on interest rates causes them to actively take positions, with 37% doing so sometimes.
Finally, we asked firms about the benchmark they use for evaluating the management of the debt portfolio and the use of interest-rate derivatives. The responses are shown in Figure 10. Of the responding firms, 47% indicated that they did not use a benchmark. For firms using a benchmark, we offered several pre-specified choices including an interest-expense-volatility benchmark, three versions of a cost-of-funds benchmark, and an open option for firms to indicate a different benchmark. Among the benchmark users, the three realized-cost-of-funds benchmarks (as a group) were the most popular, with 45 % of the firms benchmarking realized costs of funds against a market index (e.g., LIBOR LIBOR
See: London Interbank Offered Rate
See London interbank offered rate (LIBOR). ) and 38% benchmarking the realized cost of funds Cost of Funds
The interest rate paid on an outstanding loan.
Money isn't free! Cost of funds is the cost of borrowing money.
See also: Interest Rate
Cost of funds
Interest rate associated with borrowing money. against a portfolio with a pre-specified fixed/floating mix. Of the firms, 16% benchmarked the cost of funds against a portfolio with specific duration. Only 21% of the firms using a benchmark reported using a volatility-based benchmark. The remaining 12% of the firms with benchmarks indicated the use of some other form of benchmark. Among their choices were benchmarking against competitors' cost of funds or relative to the previous period.
V. Option Contracts
One objective of this year's survey was to gain a deeper insight into the use of options by US nonfinancial firms. We have learned in past years that options are generally less popular than forwards in the FX area, swaps in the IR area, and futures in the CM area. Option use tended to be concentrated in exposures that are longer term and more contingent Fortuitous; dependent upon the possible occurrence of a future event, the existence of which is not assured.
The word contingent denotes that there is no present interest or right but only a conditional one which will become effective upon the happening of the . Firms limited their option usage either because they felt some other instrument was better suited to the exposure or they pointed to some obstacle to their use, such as excessive cost or lack of sufficient comfort with their behavior. This year we were interested in exploring some other aspect of option usage. Rather than as in the past, when we treated options as a homogenous homogenous - homogeneous group, we decided to explore the usage of different flavors of options. The variety of options commonly used in the market today has increased dramatically over the past few years. In addition to standard options, average-rate options, barrier options, and option combinations are widely available in the over-the-counter market over-the-counter market
Trading in stocks and bonds that does not take place on stock exchanges. Such trading occurs most often in the U.S., where requirements for listing stocks on the exchanges are strict. . Thus, we decided to ask firms to indicate their usage over the past 12 months of a variety of different options across the three common classes of risk, foreign currencies, interest rates, and commodities. The results are displayed in Table 6.
Of the 200 derivatives-using firms, 68% indicated [TABULAR DATA FOR TABLE 6 OMITTED] that they had used some form of option within the past 12 months. FX options were the most common, used by 44% of derivatives-using firms, while IR and CM options were used by just 28% of derivatives-using firms. The results as to the percentages of firms using different types of options are also displayed in Table 6. The first column of the table displays the total percentage of users of each type of option relative to all derivatives-using firms. The next three columns display the percentage of those firms using each type of option in each of the three risk classes.
The instrument-specific responses indicate that the standard European-style (exercisable only at maturity) and American-style (exercisable any time up to maturity) options are the most commonly used, with 42% of responding firms using European-style and 38% using American-style options American-style option
An option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded equity options are American style. . Option combinations, such as collars, straddles, etc., are used by 25% of all derivatives users. The most commonly used exotic option Exotic Option
Any non-standard option.
This is the opposite of a plain vanilla option.
See also: Barrier Option, Down-and-In Option, Down-and-Out Option, Equity-Linked Foreign Exchange Option - ELF-X, Option, Quanto Option, Vanilla Option
is the average-rate option, which is different in that its payoff is based upon the difference between the strike price and some average of the history of prices. This type of option is used by 19% of derivatives users. Barrier options, which come into existence or cease to exist when some price point is reached, are used by 13% of the firms, while contingent-premium options, with deferred or contingent-premium payments, have been used by just 6% of the firms in the past 12 months. Among the "other" type of options used are compound options (i.e., options on options) and equity options generally. Another feature revealed by the table is that options usage is heaviest in foreign currencies and commodities. Currency-option usage is heaviest in the European-style and the exotic exotic
not native, not indigenous. basket and barrier options while commodity option usage is heaviest in the American-style and average-rate options.
Several notable conditional results relate to option usage based on size and industrial sector. First, the percentage of firms using options is an increasing function (Math.) a function whose value increases when that of the variable increases, and decreases when the latter is diminished; also called a monotonically increasing function ltname>.
See also: Increase of firm size. Of large firms that used derivatives, 74% indicated the use of some form of option within the past 12 months. This compares with 58% of medium-size Adj. 1. medium-size - intermediate in size
medium-sized, moderate-size, moderate-sized
sized - having a specified size firms and 47% of small firms. By industry, manufacturing firms were most likely to use options, with 78% indicating some use compared to 67% of primary-product firms and 50% of service firms. Manufacturing firms are substantially more likely to have used European-style relative to American-style options, while the opposite is weakly weak·ly
adj. weak·li·er, weak·li·est
Delicate in constitution; frail or sickly.
1. With little physical strength or force.
2. With little strength of character. true for firms in the primary-product and service sectors. Manufacturing firms are also more likely to have used barrier options, with most of this use being in the FX area. Finally, option combinations are most commonly used by primary-product firms.
The derivatives-using firms that did not use options were asked to provide an explanation for this decision. The overwhelming explanation for not using options focused around their costs, with a substantial number of firms complaining com·plain
intr.v. com·plained, com·plain·ing, com·plains
1. To express feelings of pain, dissatisfaction, or resentment.
2. To make a formal accusation or bring a formal charge. that they were "too expensive." Among the other explanations for non-use were that options were not appropriate for the firm's exposure or that other instruments were better suited for their exposures, and that the firm lacked sufficient or adequately trained staff in order to use options.
VI. Control and Reporting Procedures
As in the previous two surveys, we asked questions about internal policy regarding derivatives usage and reporting as well as corporate policies regarding the monitoring and evaluation of derivatives risks. To provide a sense of the change in the control and reporting environment for derivatives usage among US non-financial firms, we will contrast the current results with those found in the previous surveys.(5)
A. Corporate Policy and Reporting
This survey asked two specific questions about internal procedures regarding derivatives. The first question asked whether the firm has a documented corporate policy with respect to the use of derivatives. Of the firms using derivatives, 79% report having such a documented policy. This is a slight increase over previous years. The second question asked how frequently derivatives activity is reported to the board of directors. Figure 11 shows that 50% of the firms have no preset preset Cardiac pacing A parameter of a pacemaker that is programmed permanently when manufactured schedule, while 27% report to the board either monthly or quarterly and another 17% only annually. By cross checking the answers to these two questions, we can determine how many firms have neither a documented policy nor a regular schedule for reporting to the board of directors. Only 27 firms, or 14% of the firms using derivatives, indicate having neither a documented policy nor regular reporting of derivative activity to the board. This percentage is similar to that found for this same cross tabulation A cross tabulation (often abbreviated as cross tab) displays the joint distribution of two or more variables. They are usually presented as a contingency table in a matrix format. in the 1995 survey.
B. Counterparty Risk Counterparty Risk
The risk to each party of a contract that the counterparty will not live up to their contractual obligations.
In most financial contracts, counterparty risk is known as default risk.
To investigate policies with respect to counterparty risk, we asked what is the lowest-rated counterparty Counterparty
The other participant, including intermediaries, in a swap or contract. with which the firm will enter into a derivatives transaction. As shown in Figure 12, for derivatives with maturities 12 months or less, 25% of the firms insist on a rating of AA or above for the counterparty, and 74% of the firms insist on A or above. Policies become even stricter for derivatives with maturities longer than 12 months. Of the firms, 40% insist on a rating of AA or above. These results are quite similar to previous years. The results suggest that a rating of A or below significantly handicaps a bank in offering derivatives, especially those with longer maturities.
C. Monitoring and Evaluation
In the context of general equities, keeping an activity within the firm. For example, rather than go to the marketplace and sell a security for a client to anyone, an attempt is made to find a buyer to complete the transaction with the firm. sources are the most important source for revaluing derivatives, with just 38% indicating that they still rely primarily on the original dealer. Also, 26% of the firms indicated a primary reliance on another dealer, consultant, or professional price vendor. This increase in in-house valuations as the primary source of valuation does not seem surprising given the widespread availability of low-cost software for end-user (job) end-user - The person who uses a computer application, as opposed to those who developed or support it. The end-user may or may not know anything about computers, how they work, or what to do if something goes wrong. pricing.
With regard to the risk of the derivatives portfolio, we asked firms to indicate whether they calculate a "value-at-risk" measure. Value at risk (VAR) is a technique for determining the value loss that the derivatives portfolio could hypothetically hy·po·thet·i·cal also hy·po·thet·ic
1. Of, relating to, or based on a hypothesis: a hypothetical situation. See Synonyms at theoretical.
a. Suppositional; uncertain. suffer with some given probability and assumptions about the statistical properties of the underlying price processes. It originated as a method for controlling trading risks at banks and financial institutions but has subsequently been marketed to non-financial corporations. Of the derivatives users, 44% indicated that they calculated a value at risk measure for some or all of their derivatives portfolio. Use of VAR was much more common among large firms and firms in the primary-products sector.
Finally, we were also interested in the firm's philosophy for evaluating the entire risk-management function within the firm. The survey asked firms to choose from among four statements the one that best describes the practice within their firms. The results are displayed in Figure 14. The most popular choice was reduced volatility Volatility
1. A statistical measure of the tendency of a market or security to rise or fall sharply within a period of time.
2. A variable in option pricing formulas that denotes the extent to which the return of the underlying asset will fluctuate between now and the relative to some benchmark. This was the approach of 40% of the respondents. Of firms, 22% indicated that they evaluated the risk-management function based upon its ability to increase profits relative to some benchmark, while 18% used an absolute profit-or-loss approach to risk-management evaluation. Finally, 21% of the firms indicated that they prefer to examine a risk-adjusted performance measure (profits relative to volatility change) to evaluate the risk-management function. Given that the purpose of risk management is to reduce risk rather than increase profits, it is surprising that 40% of the firms (22% + 18%) have a profit-based approach to risk-management evaluation. Such an approach can provide incentives for risk managers to take positions that may ultimately increase the total riskiness risk·y
adj. risk·i·er, risk·i·est
Accompanied by or involving risk or danger; hazardous: "Anything that promises to pay too much can't help being risky" of the firm.
VII. Non-Use of Derivatives
Given that firms not using derivatives are as prevalent prevalent
widespread occurrence. as firms using derivatives, we once again asked firms that did not use derivatives to provide some information concerning why they choose not to use them. To do this, we asked the non-users of derivatives to rank the three primary factors from a list of eight possible factors (including an "other" category) in their decision not to use derivatives. The responses to this question are shown in Figure 15.
The figure reveals that the majority (60%) of firms do not use derivatives because their exposures are too small. An additional 14% of non-users with potentially large exposures indicated that the most important reason they do not use derivatives is that they can manage these exposures effectively by other means, such as operational diversification Diversification
A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance.
Diversification is possibly the greatest way to reduce the risk. or risk-shifting/sharing arrangements.
Another group of non-users indicated that they did not perceive the benefits of derivatives use to exceed the costs, making their use a poor business decision. This was the most important reason for not using derivatives for 13% of non-users, but a secondary or tertiary tertiary (tûr`shēârē), in the Roman Catholic Church, member of a third order. The third orders are chiefly supplements of the friars—Franciscans (the most numerous), Dominicans, and Carmelites. reason for nearly an additional 40% of the non-users.
The only other concern receiving much weight was the concern about perceptions of derivatives use by others, such as investors/analysts. Of the firms, 10% indicated that this was the primary reason in their mind for not using derivatives, with an additional 31% citing it as a supporting explanation.
The other three specifically mentioned issues, difficulty pricing and valuing derivatives, concerns over disclosure requirements of the SEC, and concerns over the new FASB accounting treatment, all generated only token In programming, a string of characters. For example, in the C expression #define MAXAMOUNT 50000, MAXAMOUNT is the token. See also token passing and authentication token.
1. measures of concern from the respondents. Among the other issues that more than one firm mentioned for not using derivatives were corporate prohibition prohibition, legal prevention of the manufacture, transportation, and sale of alcoholic beverages, the extreme of the regulatory liquor laws. The modern movement for prohibition had its main growth in the United States and developed largely as a result of the on their use, adverse prior experiences, and limited knowledge. Overall, these responses vary only slightly from the responses to the same question asked in the 1995 survey.
Many of the results of this year's survey confirm and reinforce those found in previous surveys. In particular, derivatives use is not widespread, with less than half of the population of firms using financial derivatives of any kind. While the intensity of derivatives use appears to be increasing among the firms using derivatives, no compelling evidence suggests that the total percentage of firms using derivatives has changed dramatically over the past four years. Foreign-currency derivatives are the most commonly used, followed by interest-rate, commodity, and equity derivatives In finance, an equity derivative is a class of financial instruments whose value is at least partly derived from one or more underlying equity securities. Market participants trade equity derivatives in order to transfer or transform certain risks associated with the , respectively. A constant thread of these surveys has been that firms overwhelmingly use derivatives for the purposes of managing risk and that the risks they manage tend to be easily identifiable, contractual exposures.
This year's survey also asks several new questions to add to our understanding of derivatives use and financial price exposure among these firms. In particular, these questions helped us to discover more about the distribution of underlying currency exposures faced by these firms as well as the extent to which firms hedge the currency exposure they face. In addition, we investigated performance benchmarking for both FX and IR risk management use by these firms. We also measured the use of a variety of different option instruments.
Many of the questions on control and reporting are identical to those asked in previous years to allow tracking of the responses over time. From this exercise, we perceive only small changes in firms' policies regarding derivatives, most notably a movement towards in-house sources for valuing derivatives.
Thus, these Wharton/CIBC surveys on derivatives and risk management provide a unique insight into the use of derivative instruments by US non-financial firms. From these survey responses we can look towards the future. Will derivatives use expand over time or has it reached a plateau plateau, elevated, level or nearly level portion of the earth's surface, larger in summit area than a mountain and bounded on at least one side by steep slopes, occurring on land or in oceans. defined by the economic activities of the firms? Among firms using derivatives, the usage rate is increasing, suggesting that these firms are generally finding derivatives useful for their business. While the percentage of firms using derivatives has remained roughly constant, there remains some reason to think that a portion of the firms currently not using derivatives will begin to use them as knowledge of these instruments increases and fear of negative public perception of derivatives dies down or volatility in the world's financial prices continues to increase. Finally, as firms face the implementation of a new accounting regime for derivatives and hedging, the amount of hedging or the types of products employed may shift. As before, we intend to revisit re·vis·it
tr.v. re·vis·it·ed, re·vis·it·ing, re·vis·its
To visit again.
A second or repeated visit.
re many of these issues in a few years time when Wharton and CIBC World Markets conduct a fourth survey of derivatives usage among US non-financial firms.
The 1998 survey was sponsored by CIBC World Markets and was carried out under the auspices aus·pi·ces 1
Plural of auspex.
under the auspices of with the support and approval of [Latin auspicium augury from birds]
Noun of the Weiss Center for International Financial Research at the Wharton School. The authors would like to thank Charles Charles, archduke of Austria
Charles, 1771–1847, archduke of Austria; brother of Holy Roman Emperor Francis II. Despite his epilepsy, he was the ablest Austrian commander in the French Revolutionary and Napoleonic wars; however, he was handicapped by Smithson Smith·son , James 1765-1829.
British chemist, mineralogist, and philanthropist. His gift to the United States helped establish (1846) the Smithsonian Institution. for his guidance and support.
Canadian Imperial Bank of Commerce The Canadian Imperial Bank of Commerce TSX: CM NYSE: CM, better known to most customers as CIBC, is one of Canada's major banks. CIBC is classified as a Domestic Chartered Bank (Schedule I). (CIBC CIBC Canadian Imperial Bank of Commerce
CIBC Centres Interinstitutionnels de Bilan de Compétences
CIBC Commonwealth Institute of Biological Control (Trinidad)
CIBC Commercial International Brokerage Company ) is affiliated af·fil·i·ate
v. af·fil·i·at·ed, af·fil·i·at·ing, af·fil·i·ates
1. To adopt or accept as a member, subordinate associate, or branch: with CIBC Oppenheimer Op·pen·hei·mer , J(ulius) Robert 1902-1967.
American physicist who directed the Los Alamos, New Mexico, laboratory during the development of the first atomic bomb (1942-1945).
Noun 1. Corporation, a New York Stock Exchange New York Stock Exchange (NYSE)
World's largest marketplace for securities. The exchange began as an informal meeting of 24 men in 1792 on what is now Wall Street in New York City. member. The CIBC and Oppenheimer trademarks are used under license. CIBC Oppenheimer Corp. is solely responsible for its contractual obligations and commitments.
1 The report on the 1994 survey can be found in Financial Management, Autumn, 1995, and the report on the 1995 survey can be found in Financial Management, Winter, 1996. The results of these studies have been cited in Barrons, Business Week, Financial Times, The Economist This article is about the profession. For the news publication, see The Economist.
An economist is an expert in the social science of economics. , Forbes Forbes , B(ertie) C(harles) 1880-1954.
American publisher and businessman who founded and edited (1916-1954) Forbes magazine. His son Malcolm Stevenson Forbes , and the Washington Washington, town, England
Washington, town (1991 pop. 48,856), Sunderland metropolitan district, NE England. Washington was designated one of the new towns in 1964 to alleviate overpopulation in the Tyneside-Wearside area. Post, among others.
2 These size groups were defined based upon cutoff points Cutoff point
The lowest rate of return acceptable on investments. that divided the entire sample of 1928 firms into three equal-sized groups. Given our response total, equivalent response rates across size groups would imply 133 responses per group.
3 Examples of equity risks that are commonly hedged with equity derivatives by non-financial firms include using equity puts as part of a share-repurchase program, or using total return swaps Total Return Swap
Any swap in which the non-floating rate side is based on the total return of an equity or fixed income instrument with a life longer than the swap.
Total return swaps are most common in equity or physical commodity markets. to monetize Monetize
1. To convert into money.
2. To convert from securities into currency that can be used to purchase goods and services.
For example, you'll often hear Internet marketers talk about "monetizing website visitors. equity positions in other companies.
4 Given that not all firms using currency derivatives have foreign operations from which to repatriate repatriate
To bring home assets that are currently held in a foreign country. Domestic corporations are frequently taxed on the profits that they repatriate, a factor inducing the firms to leave overseas the profits earned there. , these numbers suggest that an even larger proportion of the set of multinational firms that use currency derivatives hedge foreign repatriations.
5 Recall that differences in response frequencies across surveys can be influenced by differences in the set of responding firms.
Gordon Gordon, river in W Tasmania, Australia, 125 mi (200 km) long. Flowing from mountains to the W coast, its main tributaries are the Franklin and Denison from the N, and Serpentine and Olga to the S. M. Bodnar is an Assistant Professor of Finance at the Wharton School, University of Pennsylvania (body, education) University of Pennsylvania - The home of ENIAC and Machiavelli.
Address: Philadelphia, PA, USA. . Gregory S. Hayt HAYT How Are You Today is Executive Director at CIBC World Markets. Richard Ri·chard , Joseph Henri Maurice Known as "Rocket." 1921-2000.
Canadian hockey player. A right wing for the Montreal Canadiens (1942-1960), he led his team to eight Stanley Cup championships and was the first player to score 50 goals in a C. Marston Mar·ston , John 1575?-1634.
English playwright whose works include The Malcontent and The Dutch Courtezan (both 1604). is the James James, person in the Bible
James, in the Gospel of St. Luke, kinsman of St. Jude. The original does not specify the relationship.
James, rivers, United States
James. R.F. Guy Professor of Finance and Economics at the Wharton School, University of Pennsylvania.