Exhange Risk Faced by Multinational Corporations (MNCs) Essay -- Exhan

Exchange treads are the amount of one outlandishs currency needed to purchase one unit of some other currency (Brealey 1999, p. 625). People wanting to exchange some money for their holiday trip provide not be too much fazed with shifts if the exchange rates. However, for multinational companies, dealing with very large amounts of money in their exercises, the rise or fall of a currency can immoral getting a surplus or a deficit on their balance sheets. What types of exchange rate happens do multinational companies face? one and only(a) type of exchange risk faced by multinational companies is transaction risk. If a gild sells products to an overseas customer it might be issuing to transaction risk. If a UK community is expecting a payment from a US customer in June and the invoice was made in January, the exchange rate is skip over to incur changed during the period. If the deal was worth 1,000,000 and the american dollar compared to exhaust sterling weakened from US$1 .40 in January to US$1.50 in June, the UK company would loose 47,619 ( appendix A). Economic risk is another type of exchange risks companies micturate to consider when dealing globally. Changes in exchange rates are bound to affect the relative prices on imports and exports, and that depart again affect the fighting of a company. An UK exporter dealing with companies in the US would not want the US$ to depreciate, because it would make the exports more expensive for the US market, thus the company will loose business.Other types of exchange rate risks are translation risk and so-called hidden risk. The translation risk relates to cases where large multinational companies have subsidiaries in other countries. On the financial statement of the whole group, the company may have to translate the assets and liabilities from foreign accounts into the group statement. The translation will involve foreign exchange exposure. The term hidden risk evolves round the fact that all companies are subject to exchange rate risks, veritable(a) if they dont do business with companies using other currencies. A company that is buying supplies from a local manufacturer might be affected of fluctuating foreign exchange rates if the local manufacturer is doing business with overseas companies. If a manufacturer goes out of business, or put through heavy losses, it will affect all the companies it does business with. The co... ...he curve. Appendix A. effect RiskA UK exporter invoicing US$1,000,000 in January for payment in June. moment ratesJanuary US$1.40714,286February US$1.50666,667Loss on transaction 47,619 (714,286 - 666,667)Appendix B.Interest Ratesi.A company borrows 100,000 from a bank at 8% interest rate.100,000 X 1.08 = 108,000ii.A company borrows 2,000,000 in 1998, with a fixed interest rate of 8%, payable annually for a 5 year period.Fixed annual interest, 8% 2,000,000 X 0.08 = 160,000 overbold annual interest, 6% 2,000,000 X 0.06 = 120,000Annual loss, 6% vs. 8% 160,000 - 120,000 = 40,000Referenceshttp//www.expedia.com, 22/11/2000, http//www.expedia.com/pub/Agent.dll Brealey, Richard A., Marcus, Alan J., Myers, Stewart C. 1999, Fundamentals of Corporate Finance, 2nd edn, Craig S. Beytien, USA. Howells, Peter., Bain, Keith 2000, Financial Markets and Institutions, third edn, Henry King Ltd., Great Britain.Ritter, Lawrence R., Silber, William L., Udell, Gregory F. 2000, Money, banking, and Financial Markets, 10th edn, USA.