1. What is a multinational corporation from a finance perspective and what is the additional financial...

1. What is a multinational corporation from a finance perspective and what is the additional financial risk that an MC is exposed to? Demand and supply determines FXrates in our currently flexible international monetary system. Please choose example FX rates and show how a reduction in that FX rate from the higher to lower rate could occur using the graph of Demand and Supply. Please identify all prices, axes and curves carefully as I will not read into what I think you are trying to show. Please explain your graph. Draw the graph on paper, take a picture and paste.

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Expert Solution

A Multi national corportion (MNC) is a company with assets or operations in more than 1 country. Thus production of goods or services for a MNC will be in atleast 1 country other than its home country which is usualy ts head quarters. From a finance perspectve, a MNC brings in additional risks related multiple currencies transacted in these multiple countries. Multiple currencies brings in foreign exchange risks which is defined as the financial risk that is created due to any financial transaction being denominated in a currency other than the domestic currency of the parent company. Thus the risk of USD fluctuatons when compared with Chinese Yen for Alibaba, a MNC based out of China & operating in US is the foreign exchange risk that Alibaba carries. Similarily, Alibaba will have foreign exchange risk for all the curencies of the countries Alibaba is operating.

The exchange rate is decided by the demand & supply of any particular curency for trade or other purposes. Demand of foreign exchange is created by the need to purchase good from a foreign country like consumerables or oil or something else. Supply of forign exchange happens through earning of foreign exchange from exports or from funds inflows in the form of FDI investments or foreign aids. When demand & supply meet, the exchange rate is fixed at that point.

In the graph above, the relative EURO USD rate depends on demand & supply of USD & EURO. Thus if a european country is in need of USD for purchase of Oil from US, the demand for USD has increased but supply has decreased. In such cases the USD has become costiler & thus USD will appreciate relative to EURO.

jeff jeffy answered 1 year ago

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