Why Foreign Exchange Sensitivity Can Be Asymmetric

Summary

The note considers why a company’s reported earnings or equity sensitivity to a foreign exchange rate movement may differ between an upward and downward scenario. It explains that the net effect depends on the company’s revenues and expenses in each currency, so exposures need not offset symmetrically. A firm with more revenue than expense in a currency can see earnings respond differently from a firm with the opposite balance.

The answer also points to currency derivatives as a possible source of asymmetry. To interpret the reported sensitivity, an analyst would need to account for changes in the fair value of the company’s hedging instruments as well as its underlying currency exposures. Those changes may require valuation models and can produce nonlinear outcomes. The discussion is a conceptual explanation rather than a reconstruction of the cited annual report figures; it does not establish which exposures or hedges drove the specific numbers, and recommends checking the statements for relevant derivatives.

Key ideas

• Currency revenues and expenses can create an unbalanced exposure that makes earnings sensitivity asymmetric.
• Foreign exchange derivatives may change value when exchange rates move and affect reported sensitivity.
• Assessing a company’s total currency sensitivity requires considering both operating exposures and hedges.
• The explanation does not calculate or verify the specific annual report figures.

Tags

# Effect of FX rate change


# Effect of FX rate change












This is an excerpt from the 2023 annual report of Lufthansa Airlines, page 240.

I seek help to understand the calculation behind these numbers. Specifically, how were the figures -239 and 264 arrived at ?

Secondly, why are these numbers asymmetric? I would expect the rise/fall based on a similar change (10% up or down) in FX rate (i.e., -239 and 239).

EDIT: This is another excerpt from the 2022 annual report of Nuvei Corporation, page 46.

Here, we see that the numbers are symmetric and more importantly, I can see the change in equity is equal to 10% of the net position of the table above.

Why is there a disparity in calculation of these numbers across financial statements ?

Is there a way to understand the Lufthansa's way of calculation ? I request help from the stackexchange community to understand or point me to a relevant textbook, where I can read more on this matter.

## Answer by student430 (score 1)

https://quant.stackexchange.com/a/81871

Earnings are roughly revenue-total expenses. If there is more revenue than expense in one currency, than the effect on earnings will be asymmetric too. And secondly they probably also do have derivatives to hedge their FX risk. If this is true (you can check in the financial statements) then you basically need to consider the change in Fair Value of all their derivatives, if the spot rate changes by 10%. This may be very complicated and requires models like discounted cash flow/black-scholes etc. And the result certainly doesn't have to be symmetric.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.