Currency risk in multinational companies

BVWireIssue #143-2
August 13, 2014

Currency risk is a significant component of total risk of multinational companies exposed to nondomestic currencies.

Large portion: Evidence exists that currency risk may be 50% of total incremental country risk or more, notes James T. Budyak (Valuation Research Corp.). For example, a recent article, “International Equities: Currencies Matter,” by Axel G. Merk (Merk Investments), points out that, when investing in international equities, the return stream generated can be broken into equity returns and currency returns. “Between 30% and 50% of monthly equity index returns, when measured in U.S. dollars, were attributable to currency fluctuation.”

The impact of currency on risk depends on the nature of the multinational company’s business, Budyak points out. If the company is completely exposed to individual local country currencies that are from emerging markets, it may have a high degree of risk. But if it is gathering hard currency from various offshore affiliates, the perception of risk is mitigated to some extent.

Budyak discusses currency risk along with other components of valuing a multinational company in an article in an upcoming issue of Business Valuation Update.

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