subject: How Do Stocks Hedge Against Currency Risk? [print this page] It's no secret that many Expat's in Asia need some form of currency hedging. Whether they get paid in a different currency or plan on living in a country with a different currency in the future, currency can pose a risk to your future plans. The good news is, in today's global economy, global companies can hedge your position for you. A quick glance at the earnings call transcript of companies like McDonald's (MCD), Nestle, Proctor & Gamble (PG), Unilever (UL), Coca-Cola (KO) and you'll see comments like this:
"Diluted earnings per share were $1.00, up 15% (9% in constant currencies) including a $0.05 per share currency benefit."
That's because earnings from around the globe are earned in different currencies. Then, when translated into earnings in the base currency, reflect any currency strength or weakness. Take a look at the chart below of McDonald's (MCD). From 2005-2008, the USD lost value against other currency's like the RMB and the EUR. The red represents growth if the currencies held constant. In some years, the growth is almost double.
McDonald's (MCD) Quarterly System Wide Sales Growth (Year over Year)
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McDonald's is a stock based in USD. The dollar declined vs. other currencies during this time period by about -18%. You would think this would have diluted your account value by 18%.
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However, McDonald's (MCD) stock performance, with the aid of currency profits from a declining USD, boosted its overall profits in USD and the stock rose over 100% in the same time period.
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. It's important to remember these 3 important currency hedging strategies.
Buy Stocks with International Exposure like McDonald's (MCD), currently now trading above $70.
Buy Direct Foreign Companies in the currency you wish to use in the future, like China Mobile Ltd. (CHL) if you wanted RMB exposure.
Buy Hard Assets like Oil (USO), Gold (GLD), Silver (SLV), and even property stocks.
Disclosure: Author Kevin Monaghan, Senior Account Executive at Elite Investment Group currently owns SLV, CHL, MCD.
