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FOREIGN EXCHANGE AND CROSS‐BORDER VALUATION
Author(s) -
O'Brien Thomas J.
Publication year - 2004
Publication title -
journal of applied corporate finance
Language(s) - English
Resource type - Journals
eISSN - 1745-6622
pISSN - 1078-1196
DOI - 10.1111/j.1745-6622.2004.tb00546.x
Subject(s) - currency , valuation (finance) , economics , foreign exchange risk , assertion , foreign exchange market , monetary economics , financial economics , valuation effects , exchange rate , foreign exchange , business , finance , computer science , programming language
Should a corporate financial manager analyze a cross‐border investment proposal from the perspective of the foreign currency or the home currency? The conventional wisdom among economists is that it doesn't matter–the valuation of an asset should be the same in one currency as in another, given the spot FX rate. This assertion implies that it is irrelevant whether we analyze an overseas investment's NPV in the home currency or the foreign currency, as long as we use consistent cross‐border conversions. But what happens if managers' foreign exchange forecasts differ from the efficient markets forecast that is implicit in interest rates? In that case, as this article demonstrates through a series of examples, managers' FX forecasts can affect their investment, hedging, and financing decisions.