Question

What impact has the establishment of the Euro had on the need for cash management by an MNC doing business in Euro countries? Does the existence of the euro, instead of individual country currencies, increase, decrease, or not affect cash management activity? Consider the impact on both Euro countries and other countries such as Puerto Rico and the U.S.

Answer 1

Impact of establishment of Euro has an impact for the cash management by multinational corporation which is doing business in the European countries because European union is a combination of a large number of countries which are following a single currency as Euro so, multinational corporation just need to to take their exposure in Euro and maintain the control of fluctuation of euro in order to manage their transaction and translation risk so they will be trying to to take position in European Euros and they will be trying to increase and decrease their cash management activities as well as risk position so this has led to a better management of currency exposure because of existence of one single currency and prevalence of that currency over a large number of countries.

Impact of euro as a single currency to the European country is that it will have to transact in Euro and does not have to maintain single separate currency for the country and separates monetary management so it will be trying to accommodate the monetary policies of Euro and it will be helping them to maintain the uniformity in the European union and from the other countries perspective like United States of America in Porto Rico, they need to control the fluctuation of their currency in respect of Euro rather than having a control of their currency in many separate currencies so they will be trying to manage the risk related to Euro and they will be trying to to appreciate their currency against European Euros than, country-specific.

Since Euro is used for single currency for majority of the countries in the European union and hence it can be said that Euro is providing outsider countries like United States and Puerto Rico with an opportunity of taking exposure into these countries by just hedging their risk against Euros, not separate currencies, so it is helping these countries also.