Implictation of flactuating exchange rates
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Companies conducting international operations should be concerned about exchange rate fluctuations for several reasons: 1) Exchange rate fluctuations affect company profits and the costs of imports and exports. When foreign currencies weaken, it encourages exports but increases costs of imports. 2) Exchange rates determine the nature and growth rate of multinational corporations. Favorable exchange rates reduce costs of operations and increase factors like revenue and investment that drive growth. 3) Exchange rate fluctuations impact interest rates and inflation, which further affect company costs, investments, and financial contracts. Working with stable currencies can reduce these risks for multinational corporations.
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Exchange Rate Forecasting
Each country is encouraging foreign investment due to their realization of the benefits associated to opening for the foreign investments. Foreign investments have enhanced the expansion of multiple business opportunities and many ventures are looking for foreign investors so that they are able to increase capital budgets and the technical expertise. This may also in turn enhance the management practices of such companies. The type of foreign investment that is most common is the Foreign Direct Investment (FDI). This is the act of investing capital in an enterprise that carries out its activities in another foreign country. The investment can be done by an individual a company or a group of companies. The investor is granted a control of 10% of the shares of the enterprise he invests into and they also enjoy a share of profits too. Due to the fact that the investor is a foreign party, different policies, regulations and governing factors are applied (Sornarajah, 2010). Both parties will enjoy some benefits and may still suffer some disadvantages in relation to various factors.
FD1 and exchange rates
One of the factors that that may influence the activity of FDI is the forecasting of the behavior of foreign exchange rates. Exchange rates can be defined as the price of a foreign currency in the domestic currency. They matter in their volatility and their levels. The foreign exchange rate influences the total foreign direct investment amounts to be allocated in different countries. When a currency loses its value, this means that its value decreases relatively to the other currencies value. We can use the FDI to forecast the foreign currency rate. For example, if the wages of a country and its production costs reduces this indicates a reduction in the value of tat countries exchange rate. This movement attracts foreign investors and the depreciation of the currency exchange rate improves the rate of return to foreign investors. The main disadvantage of this investment in forecasting the foreign exchange rate occurs in case of an offsetting increase in production costs and wages in a destination market for capital investment. Anticipating the movements of the exchange rate will also diminish the relative wage importance and resulting to a higher financing cost of the investment project.
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Interest rate parity has a major role in the foreign exchange markets. It connects the spot exchange rates, the foreign exchange rates and the interest rates. Forecasted exchange rates may reflect higher foreign financing costs since the conditions of the interest rate parity tend to equalize the risk adjusted forecasted rate of returns. FDI implications of the foreign exchange rates are relevant to the interest- parity caveat (Sornarajah, 2010). However there are some arguments against this relevance. Some experts argue that there is an imper ...
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Each country is encouraging foreign investment due to their realization of the benefits associated to opening for the foreign investments. Foreign investments have enhanced the expansion of multiple business opportunities and many ventures are looking for foreign investors so that they are able to increase capital budgets and the technical expertise. This may also in turn enhance the management practices of such companies. The type of foreign investment that is most common is the Foreign Direct Investment (FDI). This is the act of investing capital in an enterprise that carries out its activities in another foreign country. The investment can be done by an individual a company or a group of companies. The investor is granted a control of 10% of the shares of the enterprise he invests into and they also enjoy a share of profits too. Due to the fact that the investor is a foreign party, different policies, regulations and governing factors are applied (Sornarajah, 2010). Both parties will enjoy some benefits and may still suffer some disadvantages in relation to various factors.
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*
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Implictation of flactuating exchange rates
- 1. WHY SHOULD COMPANIES CONDUCTING INTERNATIONAL OPERATIONS BE CONCERNED ABOUT EXCHANGE RATE FLUCTUATIONS? Executive officers in multinational corporations deal with diverse issues including the externalities of fluctuating exchange rates across markets. Most companies operating in different countries maintain their assets and liabilities in foreign currencies (McKenzie, 1999). Therefore, these companies are exposed to the shifts emanating from the difference between the supply and demand of the foreign currencies against the local currencies. The fluctuating exchange rates affect the profits of an organization; therefore, companies conducting international operations should be concerned about exchange rate changes. Exchange rates define the currency levels of different countries, and as they engage in trade, the assets and liabilities are equally affected (Chwla, 2011). Currency rates impact imports and exports. The companies whose operations involve internationalized merchandise trade will have to weigh between the inclination of their activities. Exchange rates that weaken a foreign currency will encourage exports, but significant strain will be exerted on imports. Since most countries are inclined towards reducing their trade deficit, most international organizations will bear additional costs whenever the currency is weak (Euro Investor, 2012; McKenzie, 1999). Moreover, exchange rates determine the nature and rate of growth in multinational corporations. Strong local currency against a weak foreign one favors the cost of operation for a multinational company. Such a scenario emanates from the interrelation between the cost of operation and the three profitability factors: interest rates, capital investment, and accumulated revenue. The outflows in a foreign company have an inverse correlation with the internal growth; therefore, favorable exchange rates would favor the firm.
- 2. Inflation and interest rates, which are factors of fluctuating exchange rates, affects the outcomes of investment decision in multinational corporations. When a currency is devalued, then the country is at risk of a possible imported inflation. In such a case, the large-scale organizations will face an increase in the cost of operation such as inflated raw materials (Euro Investor, 2012). On the other hand, interest rates are tools applied to moderate cash flows between injections and withdrawals in the national income cycle. Therefore, an adverse change in the currency performance is a crucial concern for multinational corporations because strong domestic currency will drug the rate of profit growth. Moreover, tight monetary policies meant to stabilize interest and inflation rates could disappoint investors operating in economies of scale (Chwla, 2011). Other concerns for managers, emanating from the possibility of exchange rates fluctuations, is the existence of foreign investment policies meant to improve the revenue in the foreign countries. The financial regulations also feature in contracts and investment deals, which the executives ought to evaluate in line with the needs of their organizations. In conclusion, companies conducting international operations should be concerned about exchange rate fluctuations because they affect the interest rates, defines the degree of inflation, impact the rate of profit growth, and alters the financial dimensions of investments and contracts. In such a case, the executives of multinational corporations should consider the existing monetary policies and make predictions based on the economic performance of the countries they are associating with, which will reduce the unforeseen risks. Working with the type of currency that is stable and guarantees high profits is a vital choice. References
- 3. Chwla, C. P. (2011). Understanding the Impact of Exchange Rate Fluctuation on the Competitiveness of Business. Institute of Innovation in Technology and Management. New Delhi - 110 058. Euro Investor. (2012). How exchange rate fluctuations affect companies. Available at: http://www.euroinvestor.com/ei-news/2012/07/17/how-exchange-rate-fluctuations-affect- companies/19796 McKenzie, M. (1999). The impact of exchange rate volatility on international trade flows. Journal of Economic Surveys 13(1), 71-106.