While it has been known for some time that, under uncertainty, the original version of the Fisher hypothesis is not precisely correct, empirical researchers have largely ignored this fact. Such an omission has possibly resulted in erroneous conclusions concerning other hypotheses; most notably the impact of prices on the real economy. This paper clarifies some of the previous interpretations of the existing empirical literature and provides a theoretical version of the relation between prices and interest rates. Empirical tests based on both the Livingston survey data and data from time-series forecasting models provide support for the Fisher effect and the hypothesis that only covariance risk is priced in the Treasury bill market.

While it has been known for some time that, under uncertainty, the original version of the Fisher hypothesis is not precisely correct, empirical researchers have largely ignored this fact. Such an omission has possibly resulted in erroneous conclusions concerning other hypotheses; most notably the impact of prices on the real economy. This paper clarifies some of the previous interpretations of the existing empirical literature and provides a theoretical version of the relation between prices and interest rates. Empirical tests based on both the Livingston survey data and data from time‐series forecasting models provide support for the Fisher effect and the hypothesis that only covariance risk is priced in the Treasury bill market.

Introduction: Multinational Enterprise and Multinational Financial Management. PART ONE: ENVIRONMENT OF INTERNATIONAL FINANCIAL MANAGEMENT. The Determination of Exchange Rates. The International Monetary System. The Balance of Payments and International Economic Linkages. The Foreign Exchange Market. Currency Futures and Options Markets. Parity Conditions in International Finance and Currency Forecasting. PART TWO: FOREIGN EXCHANGE RISK MANAGEMENT. Measuring Accounting Exposure. Managing Accounting Exposure. Measuring Economic Exposure. Managing Economic Exposure. PART THREE: MULTINATIONAL WORKING CAPITAL MANAGEMENT. Financing Foreign Trade. Current Asset Management. Managing the Multinational Financial System. PART FOUR: FINANCING FOREIGN OPERATIONS. International Financing and International Financial Markets. Special Financing Vehicles. International Banking Trends and Strategies. The Cost of Capital for Foreign Investments. PART FIVE: FOREIGN INVESTMENT ANALYSIS. International Portfolio Investment. Corporate Strategy and Foreign Direct Investment. Capital Budgeting for the Multinational Corporation. The Measurement and Management of Political Risk. Glossary of Key Words and Terms in International Finance.

We investigate the relation between derivatives use and corporations’ cost of equity capital. Using a large sample of non-financial firms, we compute and analyze (i) the relative cost of equity of firms that use derivatives and those that do not; and (ii) the change in cost of equity experienced by firms initiating derivatives programs. We find that the cost of equity of derivatives users is lower than non-users by 24–78 basis points. Our results are robust to specifications that account for potential endogeneity related to a firm’s derivatives use and capital structure decisions. We further find that the reduction in the cost of equity is attributable to both lower market beta and SMB beta, suggesting that firms use derivatives to reduce their financial distress risk and that this distress risk has a systematic component that is priced in the market. Finally, the observed reductions in the cost of equity tend to be largest for smaller firms and for firms utilizing currency and interest rate derivatives.