Multinational Corporations in Foreign Exchange Market - Essay Example

Research Paper: Roles and Risks of Multinational Corporations in Foreign Exchange Market Research Paper: Roles and Risks of Multinational Corporations in Foreign Exchange Market Introduction Multinational Corporations are business entities or enterprises in diverse nations but under management from one (home) country. It is essential to note that any business entity or organization with the potentiality of having a quarter of its profits received from operations outside its native country is a multinational corporation. Multinational corporations are organizations whose activities enjoy the location in more than two nations, thus the perfect illustration of the concept of foreign direct investment (Shmuel, 2012). On the other hand, foreign exchange market relates to the international decentralized market providing the opportunity for organizations to trade currencies. Multinational Corporations execute diverse roles in the foreign exchange market such as the provision of different methods of foreign investment and promotion of exports and exports. Nevertheless, such entities tend to incur diverse risks such as exchange rate vitality and flexibility in pricing. Foreign exchange risk relates to the possibility of losing financial resources in the course of buying and selling currency due to unexpected changes in relation to exchange rates. Besides their roles in the foreign exchange market, multinational corporations face diverse risks. Roles of Multinational Corporations in the Foreign Exchange Market Multinational corporations execute diverse roles and duties within the foreign exchange market. In this section of the research paper, the focus will be on illustration of the different roles of multinational corporations in the foreign exchange market. Most of the multinational corporations tend to engage in exporting and importing of various products based on the demands and projections in their host nations. In that context, multinational corporations contribute to the promotion of imports and exports within the foreign exchange markets. Multinational corporations are also vital for the generation of diverse decisions in relation to foreign investment. That is through the integration of the market research and development programs in the course of making appropriate decisions with reference to the achievement of the goals and targets within the industry and market of operation. Multinational corporations are essential to the provision of alternative techniques of the foreign investment. It is vital to the realization of effectiveness and efficiency in the achievement of the goals and targets of foreign investment. Similarly, organizations or multinational corporations operating in the foreign exchange market concentrates on the promotion of international collaboration. Moreover, such multinational corporations in the foreign exchange markets are ideal for the determination of the net capital flows, as well as the foreign direct investment. It is also essential to note that multinational corporations promote investment in the infrastructure to aid the role of such organizations or business entities in the promotion of technology transfer. In the course of increasing effectiveness and efficiency, as well as profitability by multinational corporations, it is critical to incorporate vertical and horizontal integration while seeking to achieve competitive advantage in the market and industry. Such organizations concentrate on the incorporation of three major aspects of foreign investment. They achieve that by setting up subsidiaries, agreement with the local firms for the sale of multinational corporations’ products, and utilization of the branches of the organization within the market and industry of operation. Multinational corporations also contribute to growth and development of the foreign exchange market through the integration of capital inflows, which have the ability and potentiality of non-debt. Multinational corporations participate in the transfer of highly sophisticated technology in the developing nations, which are ideal in increasing productivity levels of the working class, thus enabling foreign exchange market to start new productive ventures under the influence of technological advancements. Multinational corporations tend to focus on increasing their investments on the development of new technologies with the potentiality of benefiting developing nations through transferring of the new technology. From that perspective, multinational corporations play a critical role in upgrading of the operations and development of the foreign exchange market (Butler, 2012). In the course of promoting exports, multinational corporations contribute to the development and rapid growth of the foreign exchange, since investors focus on utilization of the opportunities to achieve goals and targets at the end of the fiscal period. Risks faced by Multinational Corporations in Foreign Exchange Market In spite of the critical roles of multinational corporations in the foreign exchange market, such entities tend to face substantial risks while seeking to achieve their goals and targets at the end of the fiscal period. The study entails an assessment of the risks incurred by multinational corporations. In the first instance, it is fundamental to focus on understanding the risk in relation to exchange rate volatility (Gilani, 2010). One of the implications of the liberalization of the foreign investment by multinational corporations relates to the influence on the foreign exchange rate of the nation (host) of operation. It is critical to note that foreign capital inflows tend to affect the foreign exchange rate of the currency of the host country. The substantial capital inflow through foreign investment might contribute to the massive increase in the supply of the foreign exchange such as the case of the U.S dollar. The appreciation of the exchange rate of the currency of the host nation will discourage exports while encouraging imports, thus the tendency to cause the deficit in balance of trade. From that perspective, it is critical to note that capital inflows and outflows by multinationals tend to be responsible for the risks in relation to significant volatility of the exchange rate affecting the operations of the foreign exchange market. There is also the risk in relation to random movements concerning the economic patterns in the global context. That is prompted by the globalization of operations of the market and industry of services. Globalization continues to enable multinational corporations to transfer economic activities from one nation to another. That generates substantial risks in relation to random movements with reference to economic patterns (Ietto-Gillies, 2012). There are also significant risks facing multinational corporations with reference to the foreign exchange exposure. It relates to the risks facing multinational corporations engaging in the international trade, that currency exchange rates will change after companies enter into financial obligations. Such aspects of exposure to the fluctuating exchange rates have the potentiality and ability to generate significant losses for the firms in pursuit of diverse goals and targets at the end of the fiscal period. One of the common types of exposure risks is the economic exposure. It relates to the type of exposure emanating from the unexpected currency fluctuations within the company’s future cash flows, thus ineffectiveness and inefficiency in the operations of the multinational corporations within the market and industry of operation (Madura, 2012). There is also the influence of operational and financial hedging in the course of addressing the organization’s objectives within the market and industry of operation. Multinational corporations have the tendency of engaging in the operational hedging when both exchange rate uncertainty and demand uncertainty are in existence (Bhagwan, 2002). Operational hedging proves to be less necessary for the management of the short-term exposures because the market uncertainty is lower within the short context. There is also substantial risk in relation to shifting of the input sources from the native nation to the host nation. It is ideal in the course of addressing diverse needs and expectations of the business entities, as well as consumers within the market and industry of operation. Multinational corporations tend to face different risks in the course of exploiting or utilizing flexibility in the pricing techniques or mechanisms. The flexibility in pricing tends to depend on the foreign exchange rate, thus the determination of the operations or transactions of multinational corporations within the market and industry of operation. Conclusion In spite of their roles in the foreign exchange market, multinational corporations face diverse risks. Multinational Corporations execute various functions in the foreign exchange market such as the provision of different methods of foreign investment and promotion of exports and exports. Other functions or tasks include the promotion of technology transfer, infrastructure development, and expansion of market coverage for diverse entities. Nevertheless, they tend to incur various risks such as exchange rate vitality and flexibility in pricing. It is vital for the organization or multinational corporations to adopt and implement appropriate strategies to overcome the risks. References Butler, K. C. (2012). Multinational finance: evaluating opportunities, costs, and risks of operations. John Wiley & Sons. Gilani, S. (2010, September 29). Exchange-Rate Risk: The Unseen Enemy of U.S. Investors. Money Morning. Retrieved May 6, 2015 from http://moneymorning.com/2010/09/29/exchange-rate-risk/ Ietto-Gillies, G. (2012). Transnational corporations and international production: concepts, theories and effects. Edward Elgar Publishing. Madura, J. (2012). International financial management. Cengage Learning. Shmuel, J. (2012, December 18). U.S. multinational giants outshine domestic counterparts on earnings front. Financial Post. Retrieved May 6, 2015 from http://business.financialpost.com/investing/u-s-multinational-giants-outshine-domestic-counterparts-on-earnings-front Read More