Application Malaysia Gets Mauled by the Currency Markets 
In January 1994, Bank Negara, Malaysias central bank, declared war on “currency speculators” who were trying to profit from an anticipated rise in the Malaysian dollar. The timing of this declaration struck a nerve among currency traders because Bank Negara had itself long been a major speculator in the currency markets—a speculator whose boldness was matched only by its incompetence. During the two-year period from 1992 to 1993, Bank Negara had foreign exchange losses of M$14.7 billion (US$5.42 billion). It seems that even central banks are not immune to the consequences of market efficiency—and stupidity.
1 Dow Chemical stated in its 2007 Form 10-K (p. 54) that “The primary objective of the Company’s foreign exchange risk management is to optimize the U.S. dollar value of net assets and cash flows, keeping the adverse impact of currency movements to a minimum.” Although a laudable objective, it is difficult to determine what specific actions a manager should take to accomplish it.
2 Most of these elements are suggested in Thomas G. Evans and William R. Folks, Jr., “Defining Objectives for Exposure Management,” Business International Money Report, February 2, 1979, pp. 37-39.
3 See, for example, David B. Zenoff, “Applying Management Principles to Foreign Exchange Exposure,” Euromoney, September 1978, pp. 123-130.
4 This explanation appears in Kenneth Froot, David Scharfstein, and Jeremy Stein, “A Framework for Risk Management,” Harvard Business Review, November 1994, pp. 91-102. The reluctance to raise additional external capital may stem from the problem of information asymmetry—this problem arises when one party to a transaction knows something relevant to the transaction that the other party does not know—which could lead investors to impose higher costs on the company seeking capital.
5 For a good summary of these other rationales for corporate hedging, see Matthew Bishop, “A Survey of Corporate Risk Management,” The Economist, February 10, 1996, special section.
6 Fluctuating earnings could also boost a company’s taxes by causing it to alternate between high and low tax brackets (see Rene Stulz, “Rethinking Risk Management,” working paper, Ohio State University).