Question

In your role as a financial analyst, you're advising the companys CFO on an investment in a foreign country. What can you tell the CFO about the effects of exchange rates on investments made outside of the country?

Answer 1

Being the advisor to CFO of a company, our advice towards effects of exchange rates on investments to the CFO is that when the investment is made to the other country where the currency exchange rates are volatile. The investment got affected by the exchange rates as:

1. The return on the investment get differs from time to time.
2. The conversion of the currency will require the cost of brokerage.
3. The change in the exchange rates of the currency will result in worth of investment, it could be appreciating or depreciating one.
4. To nullify the exchange rate effects, the hugging of currency future will result in cost of hugging the position.
5. The exchange of currency will result in employment of currency experts and its remuneration costs, to keep control on loss due to currency exchange rates.
6. Always the effect is not negative, but sometimes it is positive also, which would attract the tax expense on the foreign exchange gains.

Thus, the exchange rates on investments will bring difference between the expected amount to be paid/received and the actual amount received or paid.

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