Exchange Rates
As with real economic growth and inflation rates, our views on exchange rates can affect the value we attach to individual companies. In this section, we will first consider why exchange rates matter, and then we will examine past history.
Why Do Exchange Rates Matter?
Changes in exchange rates in the past and expectations in the future can make a difference in valuation. For companies with foreign operations, the reported earnings are affected by changes in exchange rates. Favorable movements in exchange rates result in higher earnings, whereas unfavorable movements can result in large losses. Note, though, that what type of movement is favorable/unfavorable depends on the nature of the foreign exposure. If the firm’s costs ...
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