Essay about Exhange Risk Faced by Multinational Corporations (MNCs)

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“Exchange rates are the amount of one country’s currency needed to purchase one unit of another currency (Brealey 1999, p. 625)”. People wanting to exchange some money for their vacation trip will not be too much bothered with shifts if the exchange rates. However, for multinational companies, dealing with very large amounts of money in their transactions, the rise or fall of a currency can mean getting a surplus or a deficit on their balance sheets. What types of exchange rate risks do multinational companies face? One type of exchange risk faced by multinational companies is transaction risk. If a company sells products to an overseas customer it might be subject to transaction risk. If a UK company is expecting a payment from a…show more content…
Interest Rate Risk. Interest can be explained as the “charge paid by a borrower for to lender for the use of a lender’s money (Ritter 2000 p. 598).” The interest rate is simply the percentage of the sum a borrower has to pay the lender on top of the sum which is being lent for an agreed period of time. For example, if a company borrows £100,000 from a bank at 8% interest rate with payment due in 12 months. By the end of the 12 months the company then has to pay the bank £108,000 (Appendix B, i). What types of interest rate risks do multinational companies face? One type of interest rate risks is the transaction risk. Since the interest rates constantly rise and fall companies often fix their interest rates on loans for long periods of time. As a result of this the company looses money if the interest rate falls below their fixed rate during the period the loan is for. For example, in 1998 a company borrows £2,000,000 for a 5 year period with fixed interest rate of 8% payable annually. Each year the company then has to pay interest of £160,000. If the interest rate in 2000 falls to 6%, the company is still paying 8% interest, and will consequently “loose” £40,000 annually. Other types of interest rate risks are translation risk and economic risk. Translation risk relates to fact that changes in the interest rates will change the value of financial assets. If people expect the interest rate to increase, the

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