Growth recalculated using last year's exchange rates, so that currency moves do not distort the underlying performance of foreign operations.
A company earning half its revenue abroad can report a decline in dollars while every local market grew. Constant currency strips the translation effect, which is real for a dollar investor but says nothing about operating performance.
Translation is not the only currency exposure. Costs incurred in one currency against revenue in another create transaction exposure that constant-currency reporting does not address, and that shows up in gross-margin instead.
Example: Northwind Tools grows 8.0% as reported and 8.4% in constant currency, because a weaker euro cost 0.4 points on the $260M of European revenue.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
Educational only, not advice. Spotted an error? Post in Site Feedback.