The 1971 Flotation of the Mark and the Hedging of Commercial Transactions Between the United States and Germany: Experiences of Selected U.S Non-Banking Enterprises

According to a questionnaire survey, the forward-exchange market easily accommodated the demand of U.S. firms for forward cover of transactions with German firms during the 1971 floatation of the mark.. The U.S. firms employed a variety of hedging techniques.The recent experiments with quasi-floating exchange rates have produced new evidence on some old questions about exchange-rate flexibility. One of these questions is whether substantial flexibility disrupts international trade by stimulating more demand for forward-exchange cover than the market can easily satisfy.1For affirmative answers to this question, see the following: H.S. Houthakker, “Exchange Rate Adjustment,” in U.S. Congress, Subcommittee of the Joint Economic Committee, Factors Affecting the United States Balance of Payments, 87th Cong., 2d. sess., Washington, 1962, pp. 292–93: Robert V. Rossa in The Balance of Payments: Free Versus Fixed Exchange Rates, by Milton Friedman and Robert V. Rossa (Washington, D.C.: American Enterprise Institute for Public Policy Research, 1967), pp. 39–41; and Giuliano Pelli, “Why I Am Not in Favor of Greater Flexibility of Exchange Rates,” in Approaches to Greater Flexibility of Exchange Rates, ed. by Geroge N. Halm (Princeton, N.J.: Princeton Univ. Press, 1970), pp. 203–08. Those who answer this question in the affirmative usually reason along the following lines. Substantial exchange-rate flexibility leads business management to expect greater exchange-rate variations. Therefore, management seeks to cover more of its foreign-exchange explosure (i.e., seeks to “insure” against the greater exchange rate risk by purchasing or selling foreign currency forward. © 1973 JIBS. Journal of International Business Studies (1973) 4, 43–59