Currency assumptions can quietly break an otherwise clean valuation. For Saudi companies, the SAR peg provides a stable modeling anchor for most corporate valuation work - but the key requirement is internal consistency, not just familiarity.
This post provides a practical framework. It does not offer predictions about exchange rates or policy.
The Peg as a Modeling Anchor
For standard corporate valuation work, treat the SAR/USD peg as a stable base-case assumption. Deviation from this should be reserved for cases where there is a specific, documented reason to do otherwise - not as a reflexive caution flag.
Inflation Consistency Rule
If you model in SAR:
- Terminal growth should be consistent with SAR inflation and real growth assumptions
- Do not mix a USD risk-free rate with a SAR terminal growth narrative without making the conversion explicit
If you model in USD:
- Terminal growth should be USD-consistent
- Discount rates must be USD-denominated
The rule is simple: pick one currency for the model and make every input consistent with it.
Valuing in USD vs SAR
Both are defensible. What is not defensible is mixing:
| Model Currency | Discount Rate | Terminal Growth | Final Output |
|---|---|---|---|
| SAR | SAR-based WACC | SAR-consistent g | SAR equity value |
| USD | USD-based WACC | USD-consistent g | USD equity value, then translate |
If you translate a SAR model into USD at the end, the translation should use a consistent exchange rate assumption - typically the spot rate, with sensitivity.
Tail-Risk Stress Test (Not a Forecast)
A useful governance step is to run a stress scenario to understand downside sensitivity. This is not a prediction - it is a test of model resilience.
Typical stress parameters:
- WACC higher by 100–150 basis points
- Credit spreads wider
- ERP elevated
- Margins under pressure (relevant for import-cost-sensitive businesses)
- Working capital deterioration
Present this as a named stress case, without attaching probability or timing. The purpose is to understand how much the valuation changes under plausible adverse conditions.
Forward Points
Foreign exchange forward points reflect interest rate differentials and funding conditions between two currencies. They can inform near-term translation assumptions in multi-currency models - but they should not drive long-term terminal value assumptions. That is a category error.
This article is for educational purposes only. It explains valuation concepts and modeling choices. It is not investment advice, a recommendation, or a financial promotion. Examples use illustrative inputs. Verify all data using primary sources and consult an appropriately licensed professional before making financial decisions.
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute. This content is not endorsed by or affiliated with CFA Institute.
Abdul Gaffar Mohammed, CFA
Treasury & Investment Professional