FOREIGN EXCHANGE AND CROSS-BORDER VALUATION |
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Authors: | Thomas J. O'Brien |
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Affiliation: | Professor of Finance at the University of Connecticut. |
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Abstract: | 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. |
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