Question

Global Economy question. How does exchange rate stability affect (1) hedging strategies for Apple, a multinational organizations, (2) how it affects the balance of payments. how it can hedge to maximize profits and what strategies can be used to make a positive domestic impact on the balance of payments.

Answer 1

1,) Multinational organizations enjoy economies of scale that can span between multiple continents. Due to the size of the multinational organization, there can be risks that creates ebbs and flows of profits and expenses based upon multiple currency rate exchange differences.

If the multinational corporation owns foreign direct investments, and the currency appreciates in relationship to the dollar, there can be a substantial increase in the revenue generated based upon those currency exchange differences. Conversely, if the U.S. dollar strengthens in comparison to the currency of the foreign invested asset, there may be an attenuation of profits or augmentation of losses.

Hedging currency fluctuations through derivatives, futures contracts, and operational spreading of risk can offset a percentage of the risk incurred from foreign direct investment.

2) The balance of payments does not impact the exchange rate in a fixed-rate system because central banks adjust currency flows to offset the international exchange of funds. ... After the trade is made, it is recorded in the current account portion of the balance of payments