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Hi,
Can you help me out with this question please?
A company is considering purchasing a competitor, which has significant overseas operations, what are the foreign exchange risks and the impact these could have on the valuation of the company?
Many thanks in advance
Brian
The risks here are translation risk and economic/political risk.
Translation risk is that when they convert the assets/liabilities of the foreign part for the year-end accounts, the value of them can change due to changes in the exchange rate. A change in the exchange rate might make the assets worth less in the home currency.
Economic risk is due to the fact that it is harder to forecast the future economic situation in a foreign country. In an extreme, if the other country is politically unstable then there could be the risk (for example) of a state takeover.
If there is more risk involved then this itself can make the company worth less in the eyes of investors.
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