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A Fresh Look at Cross-Border Valuation and FX Hedging Decisions

Journal of Applied Finance, No. 2, 2013

30 Pages Posted: 13 Nov 2012 Last revised: 12 Sep 2017

Kirt C. Butler

Michigan State University

Thomas J. O'Brien

University of Connecticut - Department of Finance

Gwinyai Utete

Louisiana State University

Multiple version iconThere are 3 versions of this paper

Date Written: November 12, 2012

Abstract

We review and clarify the role of foreign exchange (FX) rates in international capital budgeting and currency risk management. We show how the outcome of an NPV analysis, from the perspective of the home currency, is affected by a misvalued current spot FX rate, or by a forecast of misvalued future spot FX rates. We also show a short-cut way to deal with converting foreign cash flow forecasts to home currency forecasts when the foreign cash flow is related to the FX rate. Additionally, we discuss a framework for incorporating the influence of FX forecasts in cross-border investment and FX hedging decisions.

Keywords: International, capital budgeting, foreign exchange rates, investments, valuation, hedging

JEL Classification: F3, G1, G3

Suggested Citation

Butler, Kirt C. and O'Brien, Thomas J. and Utete, Gwinyai, A Fresh Look at Cross-Border Valuation and FX Hedging Decisions (November 12, 2012). Journal of Applied Finance, No. 2, 2013. Available at SSRN: https://ssrn.com/abstract=2174448

Kirt C. Butler

Michigan State University ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States
517-432-0035 (Phone)
517-432-1080 (Fax)

Thomas J. O'Brien (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-3041 (Phone)
860-486-0634 (Fax)

HOME PAGE: http://www.business.uconn.edu/staff.asp?id=57

Gwinyai Utete

Louisiana State University ( email )

2163 CEBA
Baton Rouge, LA 70803
United States

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