Even the most superbly designed and executed programs seem not to reduce cashflow volatility significantly for most firms

The sad truth about foreign exchange risk management programs is that most would not pass the doctor's basic test, "First, do no harm." A study of nearly 200 large companies yielded enough evidence to cast serious doubt on the economic benefits of FX hedging programs. Even the most superbly designed and executed programs seem not to reduce cashflow volatility significantly for most firms. Given the scarce management time and substantial capital sums currently devoted to hedging, it is clear that many programs destroy value instead of protecting it.

How can it be that hedging programs that appear so elegant in theory don't work in practice? The reason, we believe, is that the theory assumes a static world in which all factors apart from FX rates stay exactly the same. In real life, however, a host of other variables—demand for parts and products, supply of raw materials, regulatory frameworks, cost and productivity of labor and capital—all change just as FX rates change.

Moreover, the relationships between all these factors are constantly shifting. Hard enough to understand in hindsight, they are virtually impossible...