Question

Create an explanation as to why multinational corporations need to understand the varying types of transactions that occur in international finance.

Describe the impact of inflation on their businesses.

Estimate the impact of market participants' expectations on forward markets for currencies.

Predict how an international company may react to this information.

Answer 1

The multinational corporations need to understand the varying types of transactions that occur in international finance as there are different laws in different jurisdictions. The companies has to adjust to different laws and taxes across different countries where it has operations.They also need to understand the complexity of the tariffs on goods that are imposed by other countries so as to minimize the impact on profitability of the company.

Impact of inflation on the businesses of Multinational Corporations (MNCs):-

The MNCs have operations in many countries and the company generally deals its operations in local currency as well the Parents presentation currency. The depreciation of the local currency with due to inflation adversely effects the purchasing power. These effects the value of assets and liabilities of the company and after translation there can be profit/loss to the parent company.

When the parent company has net monetary liability exposure when the local currency is appreciating the result is a profit, where as when the local currency is depreciating the result is a loss.

Impact of market participants' expectations on forward markets for currencies    

The market participants generally may take long positions in currencies in anticipation that the currency will appreciate and the companies may swap one currency for the other currency so as there is minimum exposure to fluctuation in the currencies. In some cases the forward markets leads to unanticipated results when there is sudden change in the macro environment.

The International company can hedge the currency in order to avoid currency fluctuations and minimize the impact of currency movement. The currency fluctuations can adversely impact the multinational companies as there may be change in the currency prices from the business transactions and the reporting period,