corrected. Any predictable, economically meaningful bias would be corrected by the
transactions of profit-seeking transactors.
The importance of market-based forecasts for a determination of the foreign ex-
change exposure of the firm is that of a benchmark against which the economic con-
sequences of deviations must be measured. This can be put in the form of a concrete
question: How will the expected net cash flow of the firm behave if the future spot
exchange rate is not equal to the rate predicted by the market when commitments are
made? The making of this kind of forecast is completely different from trying to out-
guess the foreign exchange markets.
6.7 TOOLS AND TECHNIQUES FOR THE MANAGEMENT OF FOREIGN EXCHANGE
RISK. In this section we consider the relative merits of several different tools for
hedging exchange risk, including forwards, futures, debt, swaps, and options. We will
use the following criteria for contrasting the tools.
6.7 TOOLS AND TECHNIQUES 6 • 23Exhibit 6.9. Decision Criteria for Currency Forecasting and Hedging.
A CORPORATE FORECASTER’S ROADMAPBEGIN WITH THE
FIRM’S FOREIGN
EXCHANGE
EXPOSUREFIXED OR
FLOATING
CURRENCY?EXCHANGE
OR CREDIT
CONTROLS?SPECIAL
ACCESS TO
CREDIT OR
CURRENCY?FORWARD
RATE
BIASED?SPECIAL
INFORMATION
OR MODEL?RISK
TOLERANCE
HIGH?TAKE A POSITION HEDGE THE EXPOSUREFloating FixedNoNoNoNoNoYe sYe sYe sYe sYe s