Setting Hurdle Rates Across Currencies and Countries
Summary
The discussion explains why a euro-denominated target return cannot be converted into a sterling hurdle rate simply by multiplying it by the current exchange rate. An exchange rate converts currency amounts; it does not translate a percentage return target between currencies. The appropriate analysis depends on the project’s location and currency exposure. For a project that remains in the euro area but is evaluated in pounds, expected exchange-rate changes or currency risk in the cash flows and discount rate need to be considered. For a UK project, the required return should reflect the project’s local risks and relevant differences in risk-free rates and country risk premiums.
The answers suggest comparing government bond yields as one way to examine risk-free rate differences and consulting country risk estimates for geographic risk. These are starting points, not a complete valuation method: the document does not specify a model, forecast exchange rates, or quantify any premium. The right hurdle rate therefore depends on the cash-flow currency, project location, and the investor’s exposure and assumptions.
Key ideas
- A spot exchange rate does not convert a percentage hurdle rate between currencies.
- Currency exposure in a project’s cash flows should be reflected in the valuation.
- Projects in different countries may require adjustments for local risk premiums.
- Differences in risk-free rates can affect required returns across currencies.
- The document gives conceptual guidance but no complete calculation or numerical premium.
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Full text
# Should the targeted rate of return stay the same regardless of the currency? # Should the targeted rate of return stay the same regardless of the currency? I work for a european company which invests mostly in the euro zone but also in the UK. I'm in charge with calculating the hurdle rate targeted for these investments. The internal guidelines are for euro labeled projects. But I'm trying to figure out the hurdle rate required for GBP labelled projects. Let's say I have a target return of 10% in the Euro zone. The current exchange rate EUR:GBP 1:0.89. the target IRR for UK prjects becomes 8.9% Is it the right method ? ## Answer by phdstudent (score 1) https://quant.stackexchange.com/a/48996 It depends. Is the project being carried in the original place or moving to the UK? - If the project keeps being in the original place (i.e. euro zone) and you want the IRR in GBP, then you need somehow to factor in the currency fluctuation for the cash-flows. That can be done either through adjusting the cash-flows with an expected exchange rate or by adding a risk=premium to the discount rate. - If the project is carried out in the UK, then you need to adjust for the difference in risk-premium for the project given that it is carried out in a different place. Here you have a good start for country risk premiums: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html ## Answer by dm63 (score 1) https://quant.stackexchange.com/a/49019 Point of clarification : are you asking about required returns in pounds sterling for projects conducted in the UK? If so, you also need to adjust for any difference in risk free interest rates between Euro and UK. You can do this be comparing 5yr UK gilt yields with 5year German govt bond yields , for example. I believe the UK yields are higher, so you would have a required return higher than 10%. The method you described in the question (using the fx rate) is not right!
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