January 2018 Data Update 4: The Currency Conundrum

There is perhaps no more mangled nor misunderstood part of financial analysis than the handling of currencies, and globalization has only made the problems worse. From the laziness of assuming that government bond rate in a currency is always the risk free rate in that currency, to nonsensical notions like a global risk free rate, to bad practices like discounting peso cash flows with dollar discount rates, the list of currency sins is long. In this post, I look at three of the most common misconceptions related to currencies and use them to update currency related numbers at the start of 2018.