Abstract

Information Efficiency of Foreign-Exchange Markets and Exchange-Rate Risk Management by Companies

The thesis of information efficiency of foreign-exchange markets was the subject of several empirical studies in the last few years. By far the most of these studies did not disprove this thesis. The present contribution underlines the importance of foreign-exchange market efficiency for entrepreneurial exchangerate risk management. Where foreign-exchange markets are efficient, there is no possibility for individual market participants to set up profitable exchange-rate prognoses systematically. Even a selected variety of hedging instruments (e.g. currency futures vs. currency options) does not enable companies in efficient markets to increase the cash flow they expert to see in future. The basis for any speculative or “selective” exchange-rate risk management strategies thus ceases to exist. These theoretical findings were subsequently compared with the results of an empirical study of the exchange-rate risk management by large German manufacturing enterprises. This comparison shows clear differences between practical modes of company behaviour and the modes of behaviour rationally acting market participants may legitimately be expected to show in the foreign-exchange market. This contribution ends on a discussion of possible explanations of these discrepancies between theory and practice.