Question

Exchange Rate Fluctuations

Class

We will not get into the macroeconomics of imports vs. exports, the strong US dollar, Gross Domestic Product, etc. in this class - you have/will cover these in your ECO364/365/similar course! However, we do need to understand and discuss exchange rates.  

With that said, when currency exchange rates change - which happens frequently throughout the day - what decisions can be made based on the risks? In other words, why do multinational companies need to watch the currency exchange rate?

Answer 1

Currency Exchange rates between countries depends on different  factors such as interest rate , resources , import - export ratio , investment , Gold standards . When the country's overall value in these factors increases , the value of it's currency also increases.  

when change currency exchange rates frequently occurs , it effects on the Multinational company's equity & market value . As these companies business depends on import & export , the production cost also changes according to currency exchange rate. Now it depends on MNCs wether to change selling cost or not . But generally  to keep selling rates constant in main export consuming countries , MNCs have to reduce selling cost in their consumer countries to avoid hike in prices . because hike in price leads to decrease in sale & demand . And the same is about import based companies . when companies import raw material , the changed currency exchange rate affects it's cost which directly changes the production cost . Now if the imported raw material's cost increased &   if company increased selling price to keep profit constant , again theres risk of decrease in demand & sales due to inflation which may lead to disinvestment of equity from the company . And if the imported raw material's cost get decreased , the production cost also decreases which is beneficial for the company . Then it depends on company wether not to change selling cost & keep profit or to decrease selling cost & increase sales .   

Generally to keep selling rates constant in consuming countries , MNCs use  currency exchange calculators .

The above are the direct effects of change in currency exchange rate . But sometimes , these rates may have effect on govt trade policies or taxation policies which may affect MNCs decisions .