Question

1. What are some of the important factors that influence exchange rates? How reliable are these factors in predicting or forecasting exchange rate movements?
2. Describe the major exchange rate risk related factors that multinational businesses or corporations should consider when conducting business globally.

Answer 1

1 . Some of the important factors which affect the exchange rate are as follows-

A.inflation rate in various countries can affect the exchange rate to a largest possible extent

B.rate of interest which has been decided by Central Government of country also affect the rate of exchange to a largest possible extent.

C.government debt of both the currencies also affect the exchange rate of both the countries.

D.political stability is one of the Other important factor which affects the rate of exchange.

E.terms of trade between two countries are also important while deciding upon the rate of exchange between those two countries.

these factors could help in prediction of exchange rate movements but these factors will not help completely as there would not be any accurate method for deciding upon the exchange rate precisely so one needs to be highly sceptical and one is to be highly flexible in order to determine the interest rate using this factors.

when an organisation wants to conduct the business globally it should always look for factors which affect the exchange rates to the largest possible extent like the rate of inflation which is prevailing in the domestic country as well as the international Markets and the interest rates and the monetary policies which are decided in both the countries as well as the government stability and its policy making structure is also important while deciding upon going Global while conducting business.