Question

How fluctuating exchange rates can be beneficial to MNCs and how they can affect MNCs negatively. You must give one example of each scenario in order to receive full credit for this question. Furthermore, your answer must be purely qualitative. In other words, you should not use any numerical data to answer this question.  

Answer 1

Fluctuating exchange rate can be beneficial to multinational companies because when the fluctuations will be in the favourable side, these multinational companies will be having an increase in their receivables or lower amount of their payables so it will mean that the overall benefits accruing to the multinational companies will be increasing due to the fluctuating exchange rate.

Example- Suppose any United States supplier has receivables from Indian markets in Indian rupees and if the exchange rate of Indian rupees had appreciated against the American Dollars and the value of American dollar has fallen, the overall receivables of the firm will increase due to the depreciation of American Dollars because it had exposure in receivables in Indian currency.

Fluctuating exchange rate can also be reducing the profits of the multinational corporations as they can adversely impact their overall cost and overall profits and when the the multinational corporations will be having exposure in other currencies and the currency value will be appreciating or depreciating to decrease the overall profit.

Example- suppose an American supplier will be having exposure in Indian currency and the exchange rate of Indian rupee has substantially depreciated against the American currency and it will be living to a lower amount of receivables for the American supplier because of the depreciation of the Indian currency in respect to the American currency.