Exchange rate and domestic share price

Here's a riddle I've been trying to figured out. Any thoughts?

Let say a company report its financials in a foreign currency - USD, for example - but are listed on an exchange with a different currency - AUD, say.

It seem that when the aussie drop against the greenback, the stock reporting its functional currency in USD also drop.

At first glance that seem to make sense - for AUD-based investor, the AUD being lower against USD mean the stock price need to drop to make up the difference, i.e. to be cheaper/same valuation as before.

BUT...

that doesn't make sense, at least to me.

I mean it make sense for the buyer to pay less, but why does the company's become less valuable? If anything, the company's stock ought to be more expensive just to stay at the same valuation before the rate changes.

luutzu said:

Here's a riddle I've been trying to figured out. Any thoughts?

Let say a company report its financials in a foreign currency - USD, for example - but are listed on an exchange with a different currency - AUD, say.

It seem that when the aussie drop against the greenback, the stock reporting its functional currency in USD also drop.

At first glance that seem to make sense - for AUD-based investor, the AUD being lower against USD mean the stock price need to drop to make up the difference, i.e. to be cheaper/same valuation as before.

BUT...

that doesn't make sense, at least to me.

I mean it make sense for the buyer to pay less, but why does the company's become less valuable? If anything, the company's stock ought to be more expensive just to stay at the same valuation before the rate changes.

Click to expand...

Does the company hedge it's equity and earnings against currency fluctuations?

cynic said:

Does the company hedge it's equity and earnings against currency fluctuations?

Click to expand...

I believe this is the issue: is the income in local or foreign currency (or edged); then it is simply a matter of keeping the valuation rights in whatever currency you are dealing with

Thanks gents. btw, I'm surprised you guys still talk to me - given my people skill and stuff

That's a good point about earnings hedges against the domestic or USD/foreign currency and earnings. So for companies like, say, CSL with about 40% of its earnings in AUD, the other earnings all over the world but report in USD... yea, that would add a few level of complexities.

But let's keep it simple and say that the company earn very little in the domestic currency and all its earnings are in the reported currency. What would the effect be?

The company I'm thinking of is Hikma Pharmaceuticals Plc (London).

It's listed on the LSE - in pounds. But has bugger all earnings in GBP, or Europe for that matter.

Most of its earnings are in the Middle East and US (about half/half).

It report its financials in USD.


So how should we value it? And what impact would the exchange rates between GBP and USD have on its share price?

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It's one of those problems where I thought it's quite simple, then it got complicated; then I thought I got it, then I didn't exactly.

It's interesting though.

From memory, the pound drop around 26% against the USD. Over the same period Hikma's share price remain pretty much the same.

I think I figured it out.

Well, according to the headlines, the pound is down and Hikma is way up. Which I think was what I was expecting... but back then it didn't work out that way and I thought why would Hikma be so low.

So maybe the market was wrong and the exchange rate is a bonus once the latest reports are release nov and in the new year.

Thanks guys.


Should check Hikma out if you're investing in the UK market. It is quite something else compare to the ASX bio/pharma sector.