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Heineken Hedges 89% ofDollar Sales asEuro.sGain Hurts Profit
of 200ya-02-2shchyy:29(.Nesh York)

Heineken Hedges 89% ofDollar Sales asEuro.sGain Hurts Profit

Feb. 2shch(.Bloomberg). Heineken NV, the world.sthird-biggest
beermaker, locked inanexchange rate of$1.12per euro on89
percent ofthe dollar revenue itexpects tomake this year, which
will wipe about 84million euros ($y0'million) off earnings and
May lead profit tofall in2004.
For next year, the Amsterdam-based maker ofMurphy.sstout and
Amstel lager has hedged about 13percent ofthe sales itexpects to
make inU.S. dollars at$1.27per euro, shaving 51million euros
from net income. The euro rose toarecord $y.29against the U.S.
Currency last week.
Heineken today said the euro.sgain against the dollar, as
well asslower beer consumption inthe U.S. And Western Europe,
limited profit growth to1.4percent in200бnd will hurt earnings
again this year. Heineken sells its namesake brand inmore than 170
countries and makes more than two-thirds ofits sales inEurope.
To ``.Tyue impact ofcurrencies onour earnings isenormous..
Chief Financial Officer Rene Hooft Graafland said atapress
conference ataHeineken brewery inAmsterdam.
The euro gained 20percent against the dollar in2003. The
rise reduced Heineken.snet income by42million euros last year.
While Heineken.ssales from North and South America climbed 10
percent last year, operating profit generated inthat region
dropped 11percent asaresult ofthe dollar.sdecline.

-.Editor: Fourcade

Story illustration: Tosee how Heineken stacks upagainst other
brewers and markets, click on{.HEIA NA13692940105CNP < GO >}

To contact the reporter onthis story:
Gabrielle Monaghan inDublin at

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To contact the editor ofthis story:
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THIS ISONE ISNOT ONHEDGING, BUT OFSCIENCE VS. HEDGEFUNDS. EXTENSIVELY DESCRIBES THE PEOPLE WITH SCIENTIFIC BACKGROUND WORKING INHEDGEFUNDS. MAY BEOFINTEREST, TOO:

Harvard, MIT Professors Flock toHedge Funds toTest Theories
200ya-02-2shch00:0y(.Nesh York)

Harvard, MIT Professors Flock toHedge Funds toTest Theories

(Published inBloomberg Market magazine.)

By Michael Peltz
Feb. 2shch(.Bloomberg). OnFriday, Jan. 9, computer science
professor John Moody was stuck inside his yellow Victorian home in
the West Hills section ofPortland, Oregon. Hewas trapped there
bythe biggest snow and ice storm tohit the U.S.Pacific
Northwest inadecade.
Moody, who runs a$6million hedge fund when he.snot doing
academic research, was also having one ofhis best trading weeks
inayear. to ``.She were upabout 4percent.. says Moody, who has a
Ph.D. intheoretical physics from Princeton University. to ``.She
managed toride the currency wave further, made money inmetals
and even got back into cattle...
Moody, 46, isamong agroup ofleading academics who are
putting their theories into practice inthe world ofhedge funds -
. lightly regulated investment pools that tap university
endowments, pension funds and wealthy individuals for capital.
Some ofthose professors, like Moody, have science
backgrounds.
Others, such asAndrew Lo, aprofessor atthe MIT Sloan
School ofManagement, and John Campbell, aprofessor inthe
economics department atHarvard University, are trained in
finance.
Still others, like Richard Clarida, aColumbia University
economics professor and former assistant secretary ofthe U.S.
Treasury under President GeorgeW.Bush, bring amacroeconomic
perspective totheir work with hedge funds.

Most Successful Managers

Some ofthe most successful hedge fund managers have come
from academia, including former Columbia computer science
associate professor David Shaw and Wharton School finance
professor Sanford Grossman.
The dean ofacademics who have become hedge fund managers is
James Simons, 65, former chairman ofthe mathematics department at
the State University ofNew York atStony Brook and awinner of
the prestigious Oswald Veblen prize ingeometry, which isgiven by
the American Mathematical Society every five years for outstanding
research.
In1982, Simons founded hedge fund company Renaissance
Technologies Corp. InEast Setauket OnNew York.sLong Island.
Since 1988, his flagship $shch.2billion Medallion Fund, which
focuses onfutures trading, isupalmost 35percent ayear after
fees.
One reason professors are flocking tothe hedge fund world is
the chance toget rich. Afinance professor atatop university
typically makes $yshch0,000to$22shch,000a year inbase salary.

`.Into Seven Figures.

``.Tyueir salary could goupsubstantially atahedge fund..
Says Georges Holzberger, apartner atexecutive search firm
Sextant Search Partners LLC. to ``.Tyue head ofquantitative research
atamajor fund can make well into the seven figures...
Holzberger says the potential rewards are even higher for an
academic who starts afund. Managers typically charge anannual
fee of1.5percent ofassets under management and get 20percent
ofthe profits.
To ``.I.msure everybody isgetting involved initpartly for the
money and partly tosee ifyou can really put your money where
your mouth is.. says Richard Thaler, aprofessor ofbehavioral
economics and decision-making atthe University ofChicago.s
Graduate School ofBusiness.
Thaler, 58, isaprincipal atFuller & Thaler Asset
Management Inc. The firm manages $2.'billion, including $600
million byusing what.sknown asalong/short hedge fund strategy.

ALower Price

Insuch afund, amanager hedges its long positions -
equities bought inthe hope their price will rise. byselling
short. That means borrowing securities, often from aninvestment
bank, inthe hope ofbuying them back later atalower price.
Daniel LeVine, senior managing director ofquantitative
research atCitadel Investment Group LLC inChicago, says he
expects hedge fund managers looking for ways tomaintain their
edge togoafter more academics inthe future.
``.As markets become more liquid, more electronic and more
Continuously traded, ahigher degree ofanalytics isnecessary in
order tocompete.. says LeVine, who has aPh.D. inapplied
mathematics from Brown University.
AtCitadel, which manages more than $9billion inhedge
funds, amajority ofthe 50people inthe quantitative analysis
group have Ph.D..s, including adozen who have taught.
Academia isagood training ground for hedge funds, says
Thomas Schneeweis, 56, afinance professor atthe University of
Massachusetts, Amherst. ``.An academic background offers some
insight into why and when certain investment strategies make
money.. hesays.

Useful Skill

Professors also need tobegood atpresenting ideas, auseful
skill when working with traders toimplement astrategy orwhen
explaining that strategy toinvestors. Even so, says Schneeweis,
academic professionals with little market experience have no
particular edge inthe investing world.
``.Zhust because anacademic isinvolved doesn.tmean you can
Change the rules ofnature.. hesays. ``.All investment strategies
make money incertain markets and lose money inother ones...
Professors who try tomaintain ties toacademia face added
challenges, because top universities expect professors topublish
research regularly, says Frank Meyer, 60, who recently retired as
chairman ofChicago-based Glenwood Capital Investments LLC, which
manages about $shchbillion infunds that invest inhedge funds.
``.It.syuard toserve both masters.. says Meyer. ``.At a
Hedge fund, you want tokeep your ideas proprietary, because
that.show you maintain your edge...

Collapse ofLTccM

The collapse ofLong- therm Capital Management LPin1998
underscored the risks and rewards ofhedge funds for academics.
Former Salomon Brothers Inc. Vice Chairman John Meriwether Set Up
LTCM in1993, reassembling most ofhis old Salomon arbitrage
trading group, which included several Ph.D..s.
Healso recruited Myron Scholes, afinance professor who at
the time was cohead ofthe fixed-income derivatives group at
Salomon, and Robert Merton, afinance professor atHarvard
Business School.
Merton had worked with Scholes and Fischer Black atMIT in
the early 1970s todevelop the Black-Scholes model for pricing
options. ``.LTCHM had arguably the best academic finance department
inthe country.. MIT.sLosays.
From 1994to1996, Meriwether and his team delivered annual
returns after fees of20percent, 43percent and 41percent.
The firm used its computer models and extensive databases to
identify pairs offinancial assets whose values had temporarily
moved apart. and that LTCM expected tocome together over time
regardless ofwhether the overall market went upordown.

Underpriced Asset

LTCM would buy the underpriced asset, Sell short the
overpriced one and then wait for the prices toconverge. LTccM.s
convergence strategy required extensive leverage, because the
price differences between the two assets tended tobesmall.
For some trades, the firm borrowed asmuch as40to50 times
its capital, says Donald MacKenzie, aUniversity ofEdinburgh
sociology professor who has published two papers onLTccM.
In1997, Scholes and Merton were awarded the Nobel prize in
economics for their work onoptions theory. Their acclaim offered
little comfort toLTccM investors inAugust of 1998, when Russia
partially defaulted on$40billion ofits ruble-denominated debt.
Even though Russian bonds accounted for only asmall
percentage ofthe LTCM portfolio, the Russian default caused
investors inmarkets around the globe toseek safer investments.
That, MacKenzie says, proved tobeLTccM.sundoing.
``.Even the trades that ought tohave gone inLTccM.sfavor
Went against them, because others who had been imitating them were
trying tounload similar portfolios.. hesays.

Consortium ofBanks

LTCM lost 44percent ofits capital inAugust of 1998.
Meriwether and his band ofacademics had tobebailed out bya
consortium of1Ы.S. And European Banks Put Together Bythen
Federal Reserve Bank ofNew York President William McDonough.
InSeptember 1998, the banks injected $e.'billion ofnew
capital into LTCM inreturn for 90percent ofits equity and
oversaw the orderly unwinding ofits portfolio.
The collapse ofLTccM had asobering effect onacademics who
were thinking ofgoing into money management. to ``.You couldn.tstart
acompany atthat time and just say, `.She.resmart academics. Trust
us. Give usyour money... says Harvard.sJohn Campbell, cofounder
ofmoney management firm Arrowstreet Capital LP.
Campbell, 45, was born inLondon and grew upinOxford, where
his father taught American history. Campbell.spaternal
grandfather taught theology atCambridge University.

`.Very Nice Lifestyle.

``.Being asenior academic isavery nice lifestyle.. says
Campbell, stretching out his to '-.foot-2-inchyu frame inachair inhis
Wood -paneled office atHarvard. to ``.Tyue freedom and job security one
has isunbeatable...
In1999, Peter Rathjens, aformer doctoral student of
Campbell.swho had become chief investment officer atPanAgora
Asset Management Inc., and Bruce Clarke, PanAgora.spresident,
decided toform their own money management firm. They asked
Campbell tojoin them.
Harvard restricts its professors. outside business activities
tonomore than one day aweek, or20percent oftheir time.
Clarke and Rathjens agreed with Campbell that heshould remain a
full- Tim professor.
``.Zhoyun.sagreat academic, sowhy change that?.. asks
Rathjens. ``.Moreover, hewould have better access tothe broader
flow ofideas about capital markets ifhestayed inacademia...
Campbell, Clarke and Rathjens founded Arrowstreet inJuly
1999todevelop mathematical and statistical models for investing
inglobal equity markets. Clarke ispresident and runs the now 26-
person shop.

$ya.yaBillion inAssets

Rathjens, chief investment officer, oversees the portfolios
atArrowstreet, which has about $ya.yabillion inassets. Campbell,
amanaging partner, heads upresearch.
Campbell has led the development ofArrowstreet.s
quantitative models, which try toidentify and exploit behavioral
and informational errors byinvestors.
The models look for instances when investors blunder by
overreacting tonews, following the herd orfailing toaccount for
new information. Tofind them, they analyze three factors: price
momentum, earnings indicators such aschanges inanalyst forecasts
and value measures like price-earnings ratios.
Arrowstreet looks atabout 4.'00stochks around the world,
which itgroups into some 200baskets bycountry and industry
type.
Late last year, the firm started buying Norwegian energy
company Norsk Hydro ASA, partly because itmet one ofthe firm.s
chief value criteria: Its dividend yield, about 2..yaperchent, was
larger than the dividend yields ofother natural resource
companies.

Good Momentum

The stock also had good momentum; that is, its price was
going up. to ``.She feel that indicates aherd isforming behind the
stock, and it.slikely tooutperform for some period.. Rathjens
says.
Bylast December, when Arrowstreet was building its position,
Norsk Hydro.sshare price had risen about 9percent from its
September 2003low. AsofFeb. 24, the shares were upanother 26
percent.
Two years ago, Campbell and his partners launched a
long/short hedge fund strategy.
``.For every dollar ofstocks invested long, there.sone
Dollar ofstocks invested short.. says Campbell, who generally
works two mornings aweek atArrowstreet, which isjust afive-
minute walk from his Harvard office.
Arrowstreet.slong/short strategy uses the same return
forecasting and risk models asthe firm.slong-only strategies.

Starting toTurn

Rathjens says one ofthe firm.sbest shorts was Newell
Rubbermaid Inc. InApril 2003, the firm.smodels picked upthat
the herd was starting toturn against the U.S. consumer products
maker.
Arrowstreet.straders began shorting Newell atabout $30a
share and closed out their position inOctober inthe low $20s.
Rathjens declines todisclose how much profit the firm made.
The initial performance ofArrowstreet.shedge fund has been
mixed. Campbell says the firm hopes todeliver, before fees, a
return of10percentage points above the interest rate clients
could get investing inashort- therm instrument such as90-day
Treasury bills.
The fund surpassed its objective in200аnd fell short last
year; Rathjens won.treveal specific performance numbers.
Like Harvard, MIT follows the one-day-A- necks rule. Compliance
isleft largely tothe honor system; faculty members are expected
toinform their department heads ofall outside professional
activities and are required tofill out anannual form detailing
those activities.

How Much Money

Professors don.thave todisclose how much money they made
from them.
Richard Schmalensee, dean ofthe MIT Sloan School, says
Andrew Lohas been amodel citizen when itcomes toaccounting for
his time. Lo, 43, teaches finance and investments atSloan.
He.salso director ofthe MIT Laboratory for Financial
Engineering, aresearch center that uses mathematical, statistical
and computational models tostudy financial markets. Lofounded
AlphaSimplex Group LLC, aCambridge, Massachusetts-based
investment management firm, inMarch of 1999.
Today, AlphaSimplex employs 15people. Mostly Ph.D..slike
Lo. and uses two different long/short hedge fund strategies: one
that invests only inU.S. equities and another that invests
globally instocks, bonds and currencies.
``.For Me, getting into the practical side ofthings was a
Natural progression.. Losays, sitting inhis fourth-floor office
atMIT overlooking the Charles River. ``.My research has always
been about investments...

Sabbatical From MIT

Inthe summer of1999, Lotook asabbatical from MIT, signed
alease for office space innearby Kendall Square and began
looking for financial backing.
InOctober, hemet Donald Sussman, chairman and founder of
Paloma Partners LP, which manages about $2billion inhedge funds
inGreenwich, Connecticut.
Losays they hit itoff immediately, and onNov. 1, 1999, he
signed adeal tolaunch afund for Paloma that would invest long
and short inU.S. equities byusing AlphaSimplex.squantitative
models. Losays ittook him two years torewrite the software that
hewould need atAlphaSimplex for research, development and
trading.
``.Even though the software was pretty similar towhat Iwas
Using atMIT, Ididn.twant tohave any intellectual property
conflicts.. says Lo, who was born inHong Kong and immigrated
with his family toNew York atthe age offive. ``.Shyuat IdoatMIT
with MIT funding belongs toMIT...

Price Anomalies

Lo.stitle atAlphaSimplex ischief scientific officer. About
half ofthe firm.s6,000-.square-foot Cambridge office isdevoted
tocomputers, which Loand his team use toscour markets for price
anomalies.
They look atfundamental factors such asdividend yields, as
well asbehavioral signals such asreactions toearnings
surprises. Unlike the strategy atLTccM, which was designed tofind
long- therm arbitrage opportunities, AlphaSimplex.smodels, Losays,
try tocapitalize onshort- and medium- therm imbalances inthe
supply and demand ofsecurities.
AlphaSimplex started trading its long/short fund for Paloma
inApril 2001. Although neither Lonor Paloma will comment on
performance, the fund has done well enough toattract interest in
asecond one from large investors such asGlobal Asset Management,
asubsidiary ofUBS AGthat manages $y2.8billion inhedge funds.
InDecember 2003, AlphaSimplex launched aglobal hedge fund
that plans toinvest instocks, bonds and currencies in10
countries. The $2shch0million fund closed tonew investors onFeb.
1.

Dabbled inthe Markets

Some career academics who take the plunge into hedge funds
have long dabbled inthe markets. John Moody Says Hebegan Trading
futures contracts. agreements tobuy orsell acommodity or
financial instrument ataset price and date inthe future. in
the mid-1980s asapostdoctoral student atthe Institute for
Theoretical Physics atthe University ofCalifornia, Santa
Barbara.
Hecontinued totrade for his own account atYale
University, where hetaught computer science from 1987to1991.
One ofhis best trades was abet onpalladium futures in1989
following news that two Utah scientists had successfully used
palladium rods tocreate cold nuclear fusion.
Hesays herode the price upamid the resulting speculative
furor and then shorted the futures aday before itbecame clear
that the results ofthe experiment couldn.tbereplicated -
making to $e0,000ontyue trade.
Moody, who has published more than 65research papers on
computer science, physics and finance, left Yale in1992toteach
atthe Oregon Graduate Institute inPortland, where hehad grown
up.

Take aBreak

This past autumn, hedecided totake abreak from full- Tim
academia tofocus onJEMoody & Co, a$6million hedge fund he
started almost three years ago. Heleft OGI And Joined The
Algorithms Group atthe International Computer Science Institute,
anonprofit research center affiliated with the University of
California, Berkeley.
One ofMoody.sspecialties ismachine learning, which
involves the development ofalgorithms, orseries ofinstructions,
that enable acomputer tolearn tosolve aproblem through trial
and error.
Programmers atInternational Business Machines Corp. used
machine learning tohelp teach its Deep Blue chess program, which
beat world chess champion Garry Kasparov in1997.
To ``.Tyue system utilized machine learning because brute-force
search methods weren.tsufficient.. says Moody. ``.In machine
learning, the computer doesn.ttry tomemorize everything; rather,
ittries todistill qualities ofdecisions that give good
results...

Machine Learning

Moody says that just asmachine learning algorithms can teach
acomputer toplay chess, they can enable computer programs to
learn tomake trading decisions based ondirect experience.
``.A good trader must learn torecognize and Act on
Opportunities, totrim positions when markets are uncertain or
volatile and, most ofall, toavoid the risk ofruin.. hesays.
Moody calls his computerized trading programs RoboTraders,
and heteaches them bymeans ofsimulations.
``.Shityuout risking capital, aRoboTrader can acquire 10to20
Years ofsimulated trading experience across arange ofmarkets
and market conditions.. says Moody, who has hired three
researchers and ahuman trader toexecute the trades. ``.To
graduate and golive, werequire that the strategies learned bya
RoboTrader are easily interpretable byushumans and that they
make sense...
Last October, Moody bought futures onthe Australian dollar,
which atthe time had risen about 10percent from its September
lows.

Australian Futures

ARoboTrader recommended buying Australian futures asthe
best way toplay the weakening U.S. dollar, because short- therm
interest rates were higher inAustralia than inthe U.S. and the
Reserve Bank ofAustralia was expected toraise them further,
which itdid inNovember and December.
Inmid-January, the RoboTrader said itwas time tosell, as
the dollar had started toshow short- therm strength against all
major currencies. OnJan. 15, moody closed out his futures
position, thereby making 10percent onthe trade.
Moody says his computerized trading system isright about 60
percent ofthe time and that the winning trades tend tomake much
more money than the losing ones lose.
In2003, his fund outperformed the benchmark Barclay CTA
Index of359commodity trading advisers, which was up8.6percent.
Hesays the fund made money inenergy, currencies, platinum,
silver and copper.
Professors who make the transition from academia toahedge
fund often confront amore hectic lifestyle. Columbia.sRichard
Clarida, 46, says one ofthe biggest changes for him was the
noise.

`.Pretty Loud.

``.It can get pretty loud.. says Clarida, chief economic
Strategist atNew York-based hedge fund manager Clinton Group
Inc., which invests primarily infixed-income securities.
Although hehas aprivate office, Clarida says, hespends 99
percent ofhis time atadesk inthe middle ofClinton.s50- personas
trading floor, sitting next tothe firm.sfounder and president,
George Hall.
Onthe morning ofJan. 13, the Clinton trading floor was less
noisy than usual because many ofthe traders were listening to
Alan Greenspan. They wanted tohear whether the Federal Reserve
chairman, who was speaking inBerlin, would express any worries
over the near-record U.S. current account deficit.
Greenspan didn.t, sparking arally inthe dollar. ``.Yuad he
expressed serious concern about the ability ofthe U.S. tofinance
its current account deficit, the dollar might well have broken the
other way.. Clarida says.
Clarida.sacademic background has equipped him tointerpret
the Fed.sactions. His research has focused onglobal
macroeconomics, and hehas published several papers that modeled
Fed monetary policy under Greenspan.

Bush Administration

Healso served asassistant secretary ofthe Treasury for
economic policy inthe Bush administration from February 2002to
May 2003. Asthe Treasury.schief Economist, Clarida says, hehad
several private briefings with Greenspan.
Clarida has multiple roles atClinton. He.sthere toconsult
with traders and analysts when news breaks orthe government
releases economic figures.
He.sdeveloping new trading strategies using some ofhis
academic research onthe link between exchange rates, interest
rates and yield curves.
Hehas even gotten involved onthe marketing side ofthe
business, meeting with clients when they come toNew York and
giving them his take onthe economy.
Since last autumn, Clarida has been saying that the Fed will
beinnohurry toraise interest rates aslong asU.S. economic
growth continues tobedriven bystrong productivity growth
without any significant improvement inemployment.

`.Chyuallenging Environment.

To ``.Onche the Fed does start tohike rates, there will bealot
oftightening inthe pipeline.. hesays. ``.Tyuat makes this a
challenging environment onthe fixed-income side...
It.sespecially challenging for Clinton Group, whose records
have been under review bythe U.S.Securities and Exchange
Commission and the Commodity Futures Trading Commission following
the resignation ofaClinton trader last October.
The trader, Anthony Barkan, said inane-mail that hequit
because ofadisagreement with senior management about how some of
the firm.sbonds were being priced.
Clinton hired auditing firm PricewaterhouseCoopers LLP to
investigate the matter. Hall, Clinton.spresident, said ina
letter e-mailed toinvestors onNov. 26that the results ofthe
internal review had been furnished togovernment authorities.
Inaseparate note e-mailed the same day, Clinton.sdirectors
said the investigation had shown that the firm.smethods for
valuing its assets to ``.shere consistent with industry practice.. and
``.materially accurate...

Valuation ofSecurities

Clarida declines tocomment other than tosay that his job as
economic strategist does not entail the pricing orvaluation of
any securities.
Clinton struggled last year asits flagship Trinity Fund
Ltd., which invests inmortgage bonds, was down 22percent.
Clinton began 2004with $2billion inhedge funds, down more than
60percent from apeak of$5.5billion inAugust 2003, asmany
investors pulled out late last year.
Clarida stands byhis decision tojoin Clinton. to ``.Yuedge funds
provide important liquidity tothe markets and enable them to
function better.. hesays. to ``.Yuedge funds are here tostay for
some very sound and fundamental reasons...
Still, his experience highlights the fact that academics who
stray off campus don.talways make ascore. Even with glittering
academic credentials, sophisticated quantitative models and
computers that can learn, professors can still get trumped bythe
market.

-.Editors: Labich, Henkoff

Story illustration: For aseries ofBloomberg functions related to
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To contact the reporter onthis story:
Michael Peltz inNew York

9ya0-.y98шr
www.audi-bmw.com.

To contact the editor ofthis story:
Ron Henkoff

www.audi-bmw.com.

Clarins, BMW Limit Euro.sEffect With Hedging, Plants (Update2)
200ya-0e-y20':y'(.Nesh York)

(Updates exchange rate insixth paragraph.)

by Farah Nayeri and Gregory Viscusi
March y2(.Bloomberg). Nine years ago, the surging French
currency cut profit growth atClarins SAby70percent inthe
first half, leading Chief Executive Serge Rosinoer tocomment
that ``.a slight devaluation would certainly help Clarins...
Now, with the euro up40percent against the dollar inthe
last two years, the world.slargest maker ofluxury cosmetics is
coping. Clarins, whose Paris headquarters iscarpeted inthe red
ofits logo, ishedged: insured against potential currency loss.
When the euro rises above $1.24, Clarins exercises
put options purchased the previous year, locking inthe rate at
which itconverts dollars into euros. Put options allowed Clarins
tocut currency losses last year bymore than athird, according
toPierre Milet, vice president for finance and administration.
Clarins.sprofits are further shielded through its business
inNorth America, where itdoes aquarter ofits sales, keeping
costs and earnings inthe same currency. Clarins compensates a
of 2,shch00-.strong sales force inall states except Wyoming, North
Dakota, and Montana. Clarins, maker ofAngel perfume, also is
considering building aplant outside Montreal by2010that would
make toners and lotions onsite for sale innearby markets.
``.Our margins are hit when weexport products that are made
InFrance and have costs ineuros.. said Milet, 61, sporting a
red tie inaboardroom decked with replicas ofmen.scologne
bottles. ``.She.rebetter off investing elsewhere tospread out
geographically: Save uponcurrency costs, and onshipping heavy
lotions across the Atlantic... The shares are up13percent this
year oninvestor optimism about profits.

Building Shelters

European exporters such asPrada Holding NV, Porsche AG, and
European Aeronautics, Defense and Space Co are building shelters
against the euro.srise. Most are hedged solong asthe euro
rises tonomore than $1.30. Itwas trading at$1.2230at11:15
a.m. inLondon, below its high for the year of$1.2930. Many are
also striving tosell and book costs inboth euros and dollars to
avoid being vulnerable toone currency.smovements and achieving
anatural hedge against exchange- army swings.
Asaresult, the tumbling dollar means ``.chompaniyes May see a
squeeze, cut adcosts orjuggle the production process, but
you.renot seeing zero profits.. says Paul Donovan, global
economist atUBS inLondon. Porsche.sprofit inthe six months
ended Jan. 31rose 17percent, helped bythe popularity ofthe
Cayenne sport- utility vehicle.
The 1999birth ofthe euro has meant that its 12component
economies, which dohalf oftheir trade with each other, incur
zero currency risk onthose transactions. Trade with the U.S.
Accounts for 17percent oftotal euro area trade, according to
Paris-based brokerage Exane. Nolonger do1Иuropean currencies
each move separately against the dollar, either.

More Protection

Clarins.sMilet, for instance, recalls that before the euro,
80percent ofhis sales were inforeign currencies. Today, only
half are.
Hedging techniques also enable companies tobeprotected
better and earlier against currency swings, says Milet. AJ.P.
Morgan Chase & Co. survey ofcorporate clients inthe 12nations
sharing the euro showed that they had already hedged 54percent
oftheir dollar receivables for 2004before the year had even
started. In2003, not until May had companies hedged asimilar
ratio ofreceivables for that year.
``.Chompaniyes appear more pro-active intheir hedging
Strategies.. said Paul Meggyesi, aLondon-based currency
strategist atJ.P. Morgan who helped conduct the survey.
Among those hedging are export-reliant fashion companies.
``.For the first half ofthis year, weare using structured
Hedging tocover risk.. said Riccardo Stilli, chief financial
officer ofItalian fashion company Prada, inane-mail, adding
that the policy would bereviewed inthe second half depending on
currency movements. The company declined tocomment onwhat
hedging strategies itused orhow much itsaved.

Put Options

Soare carmakers. Porsche, which does 40percent ofits
sales inthe U.S., will extend hedging contracts past their July
2007expiration, Chief Financial Officer Holger Haerter said in
aninterview last week atthe Geneva car show.
Less prudent companies are hurting. With only 40percent of
its currency risk hedged atthe beginning of2003, Volkswagen AG
reported a99percent drop inits North America nine-month
operating profit, to9million euros. The company has hedged 72
percent ofits 2004currency risk, CFO Hans-Dieter Poetsch told
reporters last July.
Both Volkswagen and Porsche use amixture ofput options and
forward exchange contracts, agreements tosell one.sown currency
and tobuy the local currency atafuture date.
Carmakers also opt for anatural hedge: Producing in
different currencies. Bayerische Motoren Werke AG, the world.s
No. 2maker ofluxury vehicles, builds the X5sport- utility
vehicle and Z4sports car inSouth Carolina, exporting about
85.000chars toEurope and selling another 65.000domestichally.

Mercedes

DaimlerChrysler.sMercedes Car Group, which accounts for
more than half ofthe company.soperating profit, istaking a
similar route: half its sales are innon-euro currencies and half
its costs are ineuros. Mercedes, which generates 18percent of
its unit sales inthe U.S., ismaking the M -Class sports utility
vehicle inAlabama and shipping some toEurope. Volkswagen
produces the New Beetle and Jetta inMexico and plans tomake the
new Golf model there aswell.
More and more ofthe 60.000member companies ofConfapi,
Italy.ssmall and midsize business association, are inquiring
about how tomove production where they.reclocking insales,
said Flavio Pasotti, who heads the association.sbranch inthe
prosperous northern city ofBrescia, and also heads Stylmeccanica
SAS, amanufacturer ofmachines that make plastic molds.

Central Bank

They aren.tgetting any more help from their central bank.
Unlike the Bank ofJapan, which spent arecord 20..yatrillion yen
($y8"billion) last year onbuying dollars topush down the yen.s
value and help Japanese exporters, the European Central Bank is
not buying dollars. Nor has itcut interest rates inthe last
nine months, amove that would help weaken the euro. Rates are at
asix-decade low of2percent.
EADS, Europe.slargest aerospace company and maker ofAirbus
planes, ishedged through 2005, using forward exchange contracts.
Still, Co -Chief executive Philippe Camus said that ifthe dollar
were totrade near $y.e0totyue euro for awhile, itwould
``.imply further cost reduction and adaptation, and we.llbe
looking for more U.S.-denominated content inour cost
structure...
``.It doesn.tmean wewill move jobs from Europe tothe U.S.,
But we.lllook for more U.S.-denominated costs.. hesaid inan
interview atthe Singapore air show Feb. 25. to ``.She have aglobal
policy todevelop our industrial capacity everywhere inthe world
tohave parallel commercial and industrial presence... Half of
Airbus.scosts are ineuros.

Naturally Hedged

BASF AG, the world.slargest chemical company, has similar
aims. ``.Our basic rule is, let.smanufacture asmuch aswecan in
the respective region, sotospeak, tobeindependent ofall
kinds ofcurrency issues.. BASF Chairman Juergen Hambrecht said
inaninterview inJanuary. Hesaid 95percent ofwhat BASF sold
inthe U.S. Was American-made, versus 60percent inthe Asia-
Pacific region.
Setting upfactories inChina also allows companies to
produce where costs are fixed tothe dollar. Inthe world.s
fastest-growing consumer market, customers pay inthe yuan, which
was fixed atabout to 8..etotyue dollar nine years ago. According to
aNovember 2003Morgan Stanley report, China accounts for 5to10
percent ofsales ofRemy Cointreau SA, Danone SAand Pernod
Ricard SA. Nestle SA.ssales there have quadrupled infive years,
the report said.
Metro Group, Europe.sthird-largest retailer, aims totriple
its wholesale stores inChina infive years; Metro already has 18
stores inChina employing 5, to.000people. Europe.sbiggest retailer
Carrefour SAhas more than twice that: 39stores.

Cyclical Industries

Still, the blow cannot becushioned entirely. According to
the Morgan Stanley report, while European companies generate
nearly two-thirds oftheir sales inEurope, the U.S. isthe
biggest overseas market, with a21percent share. A10percent
drop inthe dollar reduces European earnings by3.5percent,
according toMorgan Stanley analysts.
Cyclical industries. specifically cars, energy and
materials. stand tolose most, according tothe report. Also at
risk are pharmaceuticals, technology companies, and consumer-
goods companies.
Heineken NV, the world.sthird-largest brewer, said profit
would drop this year, partly onaccount ofthe euro.sstrength.
It``.will beseverely affected bycurrency movements.. Chief
Executive Anthony Ruys told reporters Feb. 25, estimating that
the dollar would wipe about 84million euros off this year.snet
income, double last year.

Fashion

Sales, which are converted directly from dollars and reflect
the exchange rate impact, have been hurting across the board.
Beiersdorf AG, which makes Nivea skin cream, blamed the euro for
its first yearly sales drop inatleast adecade in2003. Royal
Ahold NV, the Dutch supermarket operator, reported an11percent
fourth-quarter sales drop, partly because ofthe dollar: Ahold
does more than two-thirds ofits sales inthe U.S.
To ``.Tyue euro isour biggest problem atthe moment.. said
Michele Norsa, CEO ofValentino SpA and head ofthe apparel
division ofItalian fashion company Marzotto SpA, Valentino.s
owners, inaninterview. ``.I really hope wedon.tsee the euro at
these levels ayear from now... The euro May beworth $y.2shchat
the end of2004, according toaJanuary survey of5вnalysts,
traders and investors.
Sofar, though, global demand ismaking upfor the currency
effect. German business confidence reached athree-year high in
January, and held near that level inFebruary. French companies
boosted investment inthe last quarter of2003, helping France
grow atits fastest rate in18months.
``.So long asour sales are growing, wecould stomach the
Euro at$1.40and even beyond.. said Clarins.sMilet, taking a
drag ofhis Gitane cigarette.

To -.Shityu reporting bySara Forden inMilan, Andrea Rothman in
Singapore, and Bret Okeson inFrankfurt. Editors: Harris, Ruane,
Swardson, McCorry

Story illustration: Tograph dollars per euro,
{EUR < Crncy > GP<.GO >}. Tograph yen per dollar,
{JPY < Crncy > GP<.GO >}. For major cross currency rates,
{FXC < GO >}. For aseries ofcharts ofthe dollar,
{CNP 092YYA8"0y0"<.go >}. Topause onascreen, press the space
bar. Toresume the tour, press GO.

To contact the reporters onthis story:
Farah Nayeri inLondon at

7330738хr
www.audi-bmw.com and Gregory Viscusi inParis at

53655068 www.audi-bmw.com.

To contact the editor ofthis story:
Heather Harris at

www.audi-bmw.com

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