Question 3: 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.
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.
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.
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