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Exchange risk - Research Paper Example

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The author of the paper "Exchange risk" examines possible foreign exchange risks that multinational companies face and the economic implications of such hazards. The paper also discusses the available strategies for mitigating such risks as the purchasing power parity and interest rate parity…
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Exchange risk
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Download file to see previous pages Foreign exchange rates have an impact on the economic society as discussed. Low exchange rates are a signal to the recession economic period and consequent political instability. Conversely, substantial rates of exchange are a sign of stable commercial conditions for a country. The exchange rates directly affect the international trade. For instance, low exchange rate support activities like tourism and exports in the economy (Howell & PRS Group, 2011). At this point, domestic goods become inexpensive for the foreign buyers.
Additionally, foreign currency rates have an effect on investment funds that either move in or out of an economy. The countries that have fluctuating currency are less attractive to investors from overseas. This because all investors are assumed to be risk averse and, therefore, like returns and dislike losses. At this time, foreigners liquidate their real estates, stocks, and bonds just because such derivatives are losing purchasing power to rival investments in other countries. Foreign investors prefer making financial investments when they think that price in them will be conserved as international profits are ultimately converted back to their domestic currency.
The foreign exchange rate leads to an economic growth: it is true that the higher the price of the net exports, the higher the nation Gross domestic product. The country’s GDP is given as C+I+G+(X-M) Where C = consumer spending, C= capital, I= investment by the businesses and households, G= government spending and (X-M) = net exports. ...Download file to see next pagesRead More
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