Xjyuk

I'm an absolute beginner in economics and in the stock exchange and just encountered my first company that was listed in multiple stock exchanges and in multiple currencies. I'm aware of the invisible hand that keeps the prices of one company shares in all of these stock exchanges rationally equal, but I have no idea what is rational f.e. in case when the company is listed in two exchanges and in two currencies like EUR, and DOLLAR and then EUR would suddenly plunge 50%?

I came up with 3 scenarios:

• A: Company stock price in EUR suddenly rises 50% to make it equal with the dollar price that is not changed.


• B: Company stock price in dollars suddenly drops 50% to make it equal with the EUR prices that are not changed.


• C: The truth is probably somewhere in between dollar stock price gets down and EUR price gets up even though I have no idea what would be the ratios here.

I guess the main reason for writing this is that I don't quite understand the currency risk in the above example. If the company would have been listed only in one currency, the situation would be perfectly clear for me, but when it's in multiple currencies and invisible hand forces prices to be equal between various stock exchanges and currencies, then I don't understand what kind of risk I would be taking anymore.

It doesn’t

Dual-listed companies are more complex than you think. They are not a single company listed on two exchanges, they are two separate companies that have claims of the cash flow of the same business under the terms of their equalization agreement. So you can’t buy a share on one exchange and sell that same share on the other.

In theory, because they have equivalent claims on the same cash flow, they should have the same price. However, they are not subject to the same risks (such as currency risk, governance structures, legal contracts, liquidity, and taxation) or market forces (such as investor demand - BHP-Billiton is listed on the London Stock Exchange and the Australian Securities Exchange, the former has approximately three times the market cap of the latter). Different risk profiles will translate into different prices.

Notwithstanding, even allowing for this, dual listed companies can have unaccountable price disparities and these can persist for a very long time - we’re talking months and years here. This would seem to present a golden arbitrage opportunity. However, because the shares are not fungible the arbitrage position must be maintained until the prices converge, they can’t be forced by the arbitrager. This is risky given that this can take months or years and the shares could continue to diverge in value in the meantime.

If the shares are fungible between the exchanges, you are correct that the prices will be kept nearly equivalent by arbitrage. The missing piece to understand how the price reacts to currency fluctuations is the fundamentals of the company. This applies regardless of whether the shares are traded in a single currency or multiple currencies. It's a matter of what currencies the company's revenues and costs are denominated in, whether the company uses (or competes with) imported products, how the currency move will affect economic conditions, etc.

Once an estimate of the fundamental effect on company value is made in one currency, the effect on value in any other currency follows from a risk-free arbitrage condition. But that underlying fundamental effect can't be determined by arbitrage alone, only by the judgment of investors.

A limiting case in which we can pin things down is a company doing business in major currencies in major economies, whose shares also happen to be traded in a minor currency that has no strong relevance to its business (picture US stocks being traded in grubnick on the Elbonian exchange). If the minor currency surges or crashes but this doesn't significantly affect major economies, then the local share price will move inversely because its value in the major currencies should stay the same. This is a trivial case of the fundamental analysis.