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International Treasurer

The Corporate Treasurer's Guide to Global Financial Management


March 20, 1995

The King is Dead


By joseph Neu

Learning to cope with


the US dollar as just
another (weak) reserve
currency.
page 7

The dollar fall

Argenti na's currency board

The King is Dead

Misunderstood
and Maligned

By \oseph Neu
US companies need to start adjusting to a world
where the dol_lar is just another currency.

By Steve H. H anke
The j o hn s Hopkins University

Misunderstood
and Maligned
By Steve H.Hanke

Argentina weathers
one of the worst
storms faced by a
fixed-rate currency
regime for some time.
page 7

The king is dea d. Th e US doll ar is no longer


the world reserve currency or its best store of
value. To many treasurers outside the US, this
event was anticipated and changes little.
However, for treasurers at US multinationals,
this change has mammoth implications. It will
require a major rethinking of long-stand in g FX
policy assumptions, many of which were true
only as lon g as the US dollar remained the
world 's reserve currency. Now it is merely one
of three- and the weakest at that.

Having withstood one of the most vicious


attacks in recent memory, Argentina's currency board system is alive and well.

Spring arr i ved ea rl y in the Northern


Hem isphere. In late December, the events in
Mexico brought the bears out of hibernation,
and they were in a most foul mood . They left
an indi scrim in ate path of destruction all the
way from Mexico to the Southern Cone of
South America. Argentina was not spared. And
, until the afte rnoon of March 9 , things in
Buenos Aires looked grim.
What has this changed?
What's so aston ish in g about this is the fact
The world's financial markets appear to have
that the Argentine situation is totally different
from that in Mexico (see back page for what
resoundingly rejected the assumption that the
best way to maximize the value of future cash
might have been if it were not). On April 1,
1991 , Argentina installed a currency board-like
flows is to make them US dollar denominated.
system. Under this system, its monetary base
Investors wan t a more global and diversified
mu st be 100% covered by US dollar denomiportfolio- one that is not bound by the economic policies of a sin gle government. As a
nated assets and the peso and the US dollar are
resu lt, such common US treasury practices as
free ly convertibl e at a fixed fate of 1 :1.
full y hedg ing non-do ll ar transaction al ex poThis system is the only one of its kind in the
sures, billing in dollars, leveragi ng foreign
Americas . But this didn ' t impress the bears:
operations with only local debt, and maintainIndeed, they, along w ith their handmaidens in
ing only dollar operating accounts will need to
the press, heaped an avalanche of cr iticism
be reconsidered.
and confus ion on Argentina's unique system.
All major multinationals, whether US-based
or not, should follow the lead of central banks
Oft repeated transgressions
and investment funds and think in terms of a
basket-like eco nomic base, such as one comTh e following are some of the most often
prised of the three major re serve currencies,
repeated transgressions:
and manage their currency positions accordi ng President Menem is going to dump his
ly. They also should manage their cu rrency
ab le Minister of the Economy, Dr. Domingo
exposures more actively to deal with the distinCavallo. In a private dinner meeting with both
guish in g characte risti c of today's FX markets:
gentlemen, during the World Economic Forum
in Switzerland last Febru ary, my wife and I
volatility and dramatic overshooting as money
flees the day' s perceived weakest of the three.
helped co nvi nce President Menem to make
The last anchor of the Bretton Wood's stability
dispelling this rumor one of the central themes
is gone.
of his forma l after-dinner address at the Forum .
continued on back page

Hedging FX Risk
with RiskMetrics
By Prof. ian Giddy and
Jeffrey Wallace

In pursuit of the Holy


Grail: reducing risk
and cost without taking a market view.
page2

Reactions to New
Hedge Accounting
By Hal Davis

The pros and cons


being expressed by
corporates about the
new US hedge
accounting proposal.
page4

An MCM Duo
Estee Lauder and
Genentech tell their
stories on MCM's FX
system for Windows.
page 6

What Might
Have Been
With Argentina coming out of the woods,
Mexico looks headed
for a banking cris is.
page 8