In this thesis, the costs and benefits of foreign exchange hedging for small '1 Australian firms is examined. Previous evidence suggests that these firms hedge their foreign exchange rate risk less than large firms, despite having large incentives to hedge. Three components of foreign exchange risk management are separately examined - the transaction costs and margin requirements associated with three different hedge contracts, the relevance of the optimal hedge ratio and the forecasting ability of three methods of prediction. In the final analysis, these components are aggregated and are compared to an unhedged position and it is found that small exporting firms would have experienced a decrease in both risk and return if they had hedged their foreign exchange risk over the five and a-half years examined whereas small importing firms would have lower risk when hedging and higher returns if they had used a prediction strategy. Further, it is found that while the decrease in risk appears fairly constant for different hedge strategies, the change in return varies widely between different hedge techniques. Therefore this study highlights the importance of prudent foreign exchange management for small Australian firms.