I think it's very interesting because the Chinese entered in a very measured way. Instead of letting their currency completely float, they let it float on a limited basis and are looking to expand farther down the road. It's difficult to know when the added volatility of the Chinese currency being freely traded is going to impact the markets or what's going to happen moving forward.

One thing that we believe to be true is that it will add volatility and it will add some propensity to the markets to trend over time. What to do with that volatility is the real question. Anyone involved in international markets is going to need to know how to position themselves from a risk management perspective rather than try to forecast when it's going to happen or in which direction it's going to move.

As isolated occurrences, specific events don't really impact the market in predicted ways. The impact depends on how people are positioned in the market and what the expectations are. For instance, if everyone expects the European Central Bank to raise interest rates and that happens, there won't be much impact at all. However, if interest rates aren't raised and something unexpected takes place, then there will be a very big impact on the market.

Hurricane Katrina is a great example. As part of the devastation, gas pipelines and oil refineries are down and crude oil supplies are down. As a result, crude oil prices shoot up and there's higher inflation. Now the question for the Federal government is whether to lower rates to stimulate the economy or to raise rates to fight the inflation sitting right behind the oil shock. Regardless of what is decided, the market will expect something, so there will be a movement.

Ultimately the result of external events is volatility. Events are very unpredictable in terms of which direction the market will go, but the volatility itself is predictive.

It's the volatility, not the actual movement, that should be the focus when looking at currencies. It does not make nearly as big of a difference whether a currency rises or falls as the path the currency takes to get there. Does it happen in two or three days or does it move slowly? The impact of volatility is much more important than raw direction of price.

As for how volatility affects returns – that depends on someone's position. Investors and corporations alike need to be in position before volatility occurs, so as to be able to capture the volatility if looking to profit from it or offset the risk caused if exposed to it.

The best advice is to understand how the business or investment portfolio is affected by currency movements and volatility, understand whether the risk is viewed as something to hedge against or an opportunity to profit from, and understand how to plan for that. Then, regardless of what happens, goals are still accomplished.

Any corporation that does business overseas is going to be exposed to currency risk: a company that buys products outside of the U.S.; one that sells products outside of the U.S.; a business with investments outside of the U.S.; even a corporation with liabilities outside of the U.S.

Typically larger companies have in-house capabilities to manage the risk on a day-to-day operational basis, although many of them don't have the philosophy and theory behind how best to accomplish their goals. Oftentimes a policy has been established about how to manage currency risk and an operational procedure exists to be implemented, but the policy and the procedure are not connected. That's actually where we usually add value – by assisting to implement the corporation's policy to accomplish their goals.

Smaller companies usually have less of the operational ability than a large company, and sometimes very little expertise when it comes to currency management at all. They often really need someone like us to assist.

Truly, it's very broad – small companies have exposure as do very large ones. There's value to be added across the board.

1. Currency management used to be a dealing room situation, with plenty of liquidity but oftentimes fairly wide swings in the prices on a short-term basis. Today that's changed almost entirely in that so much is traded electronically. The liquidity has come into the market especially for people that are non-bank participants in the market; it's almost a costless transaction. And the price discovery - finding out where the price should be – has become so much easier that most participants know where the price is in the market. From a trading perspective, that's changed enormously.
2. Another major change is that 20 years ago major banks took large proprietary positions, trying to make money off of trading. Today that doesn't happen nearly as often. Most banks are now in the market to provide liquidity as opposed to take large risks.
3. The third change has been the acceptance of third-party currency specialists or managers as much more commonplace and a main part of an effective risk management program. The capability to add value through currency management used to be viewed fairly skeptically. Today it's been validated. It's become much more accepted. And that acceptance of currency management as its own discipline has really been a change only in the last 5-7 years.