Essay about Exhange Risk Faced by Multinational Corporations (MNCs)

Foreign exchange rate risk is also one of the main problem investing in emerging markets. Fluctuation often happens in emerging countries. Foreign investors could face losses because when they convert the currencies to their local currencies, they will not gain the profit that they expected. Therefore, currency fluctuations can impact the total return of investment. Meanwhile, developed countries usually have strong currencies. Which can also be a problem for foreign investor who happens to be from an emerging market to invest, since the product/service would be a lot more expensive than their local currencies.

The biggest threat for the company can be the currency fluctuation, that means not stability in their profits , so as a result of fluctuation there can be the rising of interest rates and an increase of the company’s income.

When an input (machinery, components, capital, labor, etc.) is denominated in a foreign currency, the risk exists that an unfavorable exchange rate movement will increase the cost of doing business. When the products are priced and sold in a foreign currency, an adverse exchange rate movement will make the product appear more expensive to consumers, decreasing demand or forcing the company to reduce its own profit margin to maintain lower price levels. For companies with integrated international business systems, an exchange rate shock can literally force them out of business, with their operations experiencing pressures from both cost and profit centers.

The interest rate price risk is the risk that the interest rate will increase over time and will cause the bond to lose its value in the market. If the interest rate price risk ends up decreasing over time the

Credit risk is the risk that the bank will not be able to repay funds when they ask for them.

Interest rate risk the price of the bonds changes because of the increase and decrease of the interest rates.

Foreign exchange risk consists of three main types of exposures. First, transaction exposure is when a firm has a contractual obligation under which it supposed to receive or pay a certain amount in a currency that is different than its home currency. Transaction exposure has an effect of the firm’s income statement because the accounts payables or receivables can be affected by currency exchange rates. Second foreign exchange exposure is the translation which impacts the balance sheet of the firm. It occurs when consolidating financial statements of foreign units into a company’s home currency. The third type of foreign exchange exposure is the economic which influences a firm’s cash flows when exchange rates change. This type of exposure can impact assets, liabilities, or any type of anticipated foreign currency cash exchange.

There is also risk of volatility with respect to exchange rates in the short and long term

The interest rate is the amount charged above the amount loaned, saved or borrowed while exchange rate is the value of a currency compared to another currency.

c. Exchange rate risks: significant portion of revenue stream born currency exchange risk (peso vs. USD) regardless of geographical and product diversification. These risks were absolutely external and thus could have been hardly mitigated.

Interest rates affect everything in the business world, including the amount of money you must pay on your loans and the ease of obtaining those loans, credit card rates and even the stock market. This is because high interest rates reduce corporate earnings by slowing business and making it more expensive to do business, so the prices of a company’s stock will very likely decline as its earnings declines.

Interest rates are a fraction of money that when you loan money from a bank, is a percent of that money that you additionally pay. It may seem like a small amount of money, but over years, it adds

Given the nature of its business, Jaguar is faced with three types of exchange rate exposure (1) Transaction, (2) Translation and (3) Economic . Transaction exposures arise whenever the firm commits (or is contractually obligated) to make or receive a payment at a future date denominated in a foreign currency. Translation exposures arise from accounting based changes in consolidated financial statements caused by a change in exchange rates. In this case we primarily focus on the Economic exposure -also known as Operating exposure or Competitive exposure- of Jaguar.

Exhibit 7 from the case study describes the currency development in medium term of the GBP and EURO against the dollar. We can observe that the currencies are exposed to high volatility, which means the company may register greater risk

1) What are Aspen Technology’s main exchange rate exposures? How does Aspen Tech’s business strategy give rise to these exposures as well as to the firm’s financing need?