Question

Under what circumstances might multinational firms be less subject to exchange risk than purely domestic firms in the same industry?

Answer 1

Exchange rate risk is defined as the risk that exists for a company when a financial transaction is denominated in a currency other than the domestic currency of that company. Thus by definition, a company dealing in multiple currencies, like a multi national company, would be expected to have a higher risk (as it deals with multiple currencies other than its domestic currency and there is a risk that the exchange rate will fluctuate drastically) than a domestic firm which only deals in 1 currency, its domestic currency.

Now one scenario where the domestic firm can have a higher exchange rate risk when compared with a multi national firm if if the domestic currency itself is very volatile and unstable when compared with the exchange rates in the market (maybe like the Argentinian Peso or Venezuelan bolivar which are themselves so volatile making the currency risk for the domestic company higher than the multi currency firm).