Gaining Currency Exposure with Simple Stocks

As globalization takes over the world economy, there are more variables than ever that go into the value of each company trading publicly on the stock exchange. One of these variables is the value of currency, and how currency exposure affects each company and its business.

Gaining Currency Exposure

It has become common that investors want more than companies that provide a good product. Increasingly, the macros in the marketplace are becoming more common. Investors want sectors rather than individual stocks, and they seek currency exposure with good cash flow. The reach for faster, bigger, and more consistent profits is pushing investment dollars into extreme financial derivatives.

Investors have also realized over the years that some stocks make an excellent vehicle for obtaining currency exposure. Thus, not only can investors benefit from a well run, highly profitable company, but they can rev up those profits if their projections for the currency markets and the individual stock are equally correct. Consider it a double leveraged bet: one on the value of the stock and another on currency exposure to foreign countries.

One of the most commonly ways to reduce currency exposure is to purchase commodity producers. Since commodities tend to track the change in the inflation rate (metals are especially good at achieving this effect), investors who want to limit their exposure to a single currency buy commodity producers. If the value of the currency drops, the rise in commodity price helps even out the dip.

Betting on Other Currencies

Investments made in single stocks or industries aren't always meant to reduce currency exposure, but can actually be made to increase currency exposure.

Imagine that you're a European investor looking for ways to take advantage of the valuable Euro. Knowing that the rising Euro is likely to correct, you see an opportunity in trading in your Euros for companies that do business in a number of countries. You might buy shares of stock in the car company BMW to maximize your currency exposure, knowing that as the Euro falls in value, profits made in the US in dollars, in Canada in Canadian dollars, or in Britain in pounds will better convert into the Euro and temporarily boost profits.

A popular way for Americans to gain more currency exposure is through companies like Philip Morris International (PM), which operates entirely out of US borders and the US dollar, or Coca-Cola, which makes more than half of its revenue overseas. These companies, in doing business overseas, have profits that must eventually be converted to dollars. If the exchange rate changes and the dollar loses value against other currencies, Coca-Cola and Philip Morris will show temporarily higher profits. Of course, the opposite is also true; if the dollar rises, foreign earnings will buy fewer dollars and profits will decline.

Stocks in popular companies operating overseas are an excellent way to obtain currency exposure without trading currencies on the forex market or currency exchange-traded funds on the stock market. Plus, with so many companies now doing business overseas, there are more opportunities than ever before to diversify your currency risk.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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