Hi, I have the bulk of my money invested in north American shares on the NYSE and Nasdaq and were purchased in dollars. I am trying to mitigate against the dollar losing its value over time. A lot of these companies also trade on the TDG in Germany. Am I right in thinking that by buying future shares on the TDG, if the dollar loses value, I will be protected against this currency loss by having purchased them in euro on the TDG,
When you buy e.g., a share denominated in USD you take on: (a) the risk of holding the share, i.e. the volatility in the share price between the time of purchase and the time of sale; and (b) the risk i.e. volatility of USD/EUR currency movements between the time you buy the share and the time you sell it.
By buying shares denominated in a currency other than your functional currency (i.e. the EUR) you take on fx risk. If you buy a USD share priced in EUR, the EUR share price is the USD price at the USD/EUR fx rate of the day of purchase. And when you sell it the EUR price is the USD price at the fx rate of the day of sale. (And, in addition to normal charges, you will also pay a fx commission on the buy and sell.)
So if you buy on e.g. the NYSE your broker will buy USD to make the trade, and charge you for it, or, if buying on a eurozone exchange, the exchange will quote you a price that includes the USD/EUR fx (and their commission). When you sell the share, your broker will convert the sale into EUR at the fx rate of date of sale; or if selling on a eurozone exchange, the price quoted will include the EUR/USD fx rate of that day.
Surely (market arbitrage excepted) the ultimate value of the share will be the same regardless of what currency the shareholding is denominated in?
Only on the time/day of the trade. For example, a share priced today at say 50 USD on the NYSE, should by priced at about 47 EUR on a eurozone exchange, at today’s exchange rate of 1/0.94 USD/EUR, before charges are applied,. But even if the share price remains static in USD, if the fx changes this will change the price in EUR, because of changes in the relative values of the currencies.
A lot of shares will have some in-built currency protection by virtue of large companies having assets and businesses throughout the world in other currencies.
We saw this when the pound lost a lot of value in the wake of Brexit, the FTSE 100 actually rose, mitigating some of the shareholders currency losses.
Correct, because currency volatility generally has a low correlation with market risk. But this does not rule out situations where both equity markets and fx move in parallel. Here’s an example from SeekingAlpha
Retail Currency Hedging For Your Equity And Bond Positions | Seeking Alpha . At the time of Covid, “a US investor who invested in the UK's FTSE 100 at the beginning of March 2020 would have in two weeks lost 25% from the indexes move lower and another 4.3% from the devaluation of the pound.”