Types of Currency in Companies

1.    Constant Currency

Constant currency is adjusted for inflation to reflect the real value of money over time. In economies with high inflation, financial statements are presented in constant currency to avoid distortions in accounting values. This is achieved by applying inflation indices to assets, liabilities, revenues, and expenses.

Importance of Constant Currency:

• Allows for more accurate comparisons over time.
• Reduces the impact of inflation on financial statements.
• Facilitates decision-making in inflationary contexts.

Example: In Argentina, where inflation is high, companies present their financial statements in constant currency to reflect the updated value of their assets and liabilities.

2.    Quotation Currency

The quotation currency is the one in which the prices of goods and services are expressed in a given market. For companies operating in multiple countries, the quotation currency is key for pricing and cost comparison.

Example: In the energy sector, oil and natural gas prices are quoted in U.S. dollars (USD) globally, regardless of the country of production.

3.    Reporting Currency

The reporting currency is used to prepare and disclose a company’s financial statements. It is the currency in which accounting information is presented to investors and regulators.

Example: A multinational with operations in multiple countries may have revenues in euros, dollars, and yen, but when consolidating its financial statements, it may choose to present them in U.S. dollars for easier comparison with companies in the same industry.

4.    Trade Currency

The trade currency is the one used to conduct commercial transactions. It may be the same as the quotation currency or differ from it.

Example: A company in Brazil importing machinery from Germany may set contracts in euros but make payments in Brazilian reais (BRL), depending on agreements between the parties.

5.Impact of Using Multiple Currencies in Financial Statements

Companies operating in multiple jurisdictions face risks from exchange rate fluctuations. These risks can affect:

• The conversion of revenues and expenses into the reporting currency.
• The valuation of assets and liabilities in foreign currencies.
• The company’s real profitability after exchange rate adjustments.

Exchange rate differences can impact accounting in two ways:

• Translation differences: When the financial statements of a foreign subsidiary are converted into the parent company’s reporting currency.
• Transaction differences: When payments or collections in a foreign currency change in value before being settled.

Carry Trade

Carry trade is a financial strategy that involves borrowing in a currency with low interest rates and investing in another currency with higher rates to earn a yield differential.

Carry Trade Context in Japan

In 2024, Japan has maintained interest rates close to 0%, while other countries have raised their rates to control inflation. This has created an opportunity for international investors.

How Carry Trade Works

1. An investor borrows Japanese yen (JPY) at a low rate.
2. Converts the yen to U.S. dollars (USD) and invests in U.S. Treasury bonds with a 5% yield.
3. If the exchange rate remains stable or the yen depreciates, the investor earns a significant profit from the interest rate differential.

Risks of Carry Trade

• Yen appreciation: If the yen strengthens against the dollar, dollar-denominated gains may shrink when converted back to yen.
• Changes in interest rates: If the Bank of Japan raises rates or the Federal Reserve lowers theirs, the yield differential decreases.
• Market volatility: Unexpected global events can affect exchange rate stability.