Sample interview questions: How do you assess the impact of currency exchange rates on a company’s financial performance in equity research?
Sample answer:
Assessing Currency Exchange Rate Impact on Company Financial Performance
- Revenue and Cost Impact: Currency fluctuations directly affect revenue for companies with significant international operations. Appreciation of the local currency against the functional currency reduces revenue for companies exporting to other countries. Conversely, depreciation boosts revenue. The impact on costs depends on the location of production and procurement.
- Translation Effects: Exchange rate changes lead to translation gains or losses for companies with foreign subsidiaries. For example, depreciation of a foreign currency against the functional currency will result in a translation gain for a company with subsidiaries in that jurisdiction. This gain is non-cash and does not impact operations but can significantly affect reported net income.
- Competitive Dynamics: Currency fluctuations can alter the competitive landscape, affecting market share and profitability. Companies with a weaker domestic currency may gain a price advantage over competitors operating in stronger currency markets.
- Hedging Strategies: Companies often… Read full answer
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