You've apparently had a fair amount of success in foreign exchange operations. I was curious whether you'd advise a medium-size or large corporation, or international firm, to develop an in-house capability for monitoring exchange rate fluctuation? Or would it be better to rely on banks and other consulting-type services?

Rule 8 of the Financial Accounting Standards Board causes corporations to do uneconomic things in foreign exchange in order to arrive at an acceptable accounting result. It's a poor regulation, to put it mildly. It compels companies to trade in foreign exchange and to hedge their positions. The big multinational companies already have enormous capabilities in this treasury area. Most of the big banks, like Citibank or Morgan or Chase or First Chicago or whatever, have good capabilities for advising medium-size corporations on the techniques of hedging their exchange positions. But they still need someone within the corporation who understands the spot and forward markets.[17]  I don't think spending a lot of money building up that capability would be too useful an employment of the stockholders' assets.

It seems that, recently, multinationals and other firms have been considered very lucky just to break even in their forward operations. In light of that, do you feel that a corporation should attempt to take a fairly dynamic approach, moving into forward markets and money markets? Or do you think they're better off just protecting themselves by balancing assets and liabilities and so forth?

When you try to turn foreign exchange into a profit center, you're missing the point. What we do in the Citibank, as a matter of policy, is attempt to hedge our capital overseas 100 percent. There are several countries where you can't hedge at the moment--Brazil is the biggest example. Australia really has no forward market of any magnitude.

Basically we don't try to make money or lose money on our capital position. We hedge it. But it costs us money, just like an insurance premium. Where we make our money is in trading as an intermediary for other companies who are trying to do the same--in other words, to hedge their capital.

[17] In its simplest terms, the object of positioning and hedging is to minimize the risks associated with future fluctuations in the exchange rate between currencies. In the forward market a company purchases a foreign currency for delivery on a future date at a specified exchange rate. The foreign exchange dealer who makes this contract then assumes the risk that the exchange rate between the two currencies will vary during the time between contracting and execution. The foreign exchange dealer, in turn, may hedge or offset that risk by contracting a similar, but reverse, transaction between the same two currencies. Foreign currency transactions to be executed immediately or "on the spot" are conducted in the so-called spot market.