Interesting footnote re: currency risk / companies hedging their currency exposure / etc.
When I was in my last term at business school (spring 1980) (the tail end of a period of nearly continuous U.S. Dollar down / every other currency in the world ... up) ...
I took a course titled something like : Advanced Topics in International Finance Theory.
The professor was a real iconoclast.
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(Pause for definition of iconoclast) (from dictionary.com ) :
1.One who attacks and seeks to overthrow traditional or popular ideas or institutions.
2.One who destroys sacred religious images.
Word History : An iconoclast can be unpleasant company, but at least the modern iconoclast only attacks such
things as ideas and institutions. The original iconoclasts destroyed countless works of art. Eikonoklasts, the ancestor of our word, was first formed in Medieval Greek from the elements eikn, “image, likeness,” and -klast s, “breaker,” from kln, “to break.” The images referred to by the word are religious images, which were the subject of controversy among Christians of the Byzantine Empire in the 8th and 9th centuries, when iconoclasm was at its height. In addition to destroying many sculptures and paintings, those opposed to images attempted to have them barred from display and veneration. During the Protestant Reformation images in churches were again felt to be idolatrous and were once more banned and destroyed. It is around this time that iconoclast, the descendant of the Greek word, is first recorded in English (1641), with reference to the Byzantine iconoclasts. In the 19th century iconoclast took on the secular sense that it has today, as in “Kant was the great iconoclast”
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One of the anecdotes our professor told us was :
Almost all companies (at that time) were diligently hedging away currency exposure (from : the balance sheet value of foreign manufacturing plants, (forward-dated) purchases of materials from overseas suppliers, and (forward-dated) sales of finished products to overseas customers).
Simultaneous with this -- more or less ALL company pension fund managers were going "ga-ga" regarding foreign investing.
The (U.S. Dollar) returns from owning foreign stocks had been fantastic; and the concept of "prudent man" (as it relates to managing pension assets) suggested that ignoring non-U.S. stock markets was not a good idea.
Mathematical, analytical economists looked at all of this, and noticed :
The excess return from owning foreign stocks was currency based, not anything else.
The magnitude of most corporations' "ideal" overseas stock allocation for their pension assets just happened to be pretty much exactly equal to the magnitude of all of the currency hedging that the "real business of the company" was conducting.
Thus, in a rational world -- companies should have stopped ALL currency hedging, AND ... ALL overseas investing of pension assets.
But, of course, this never happened ...
Jon. |
