Question

Explain how foreign currency exchange rate fluctuations can impact the earnings of a multi-national firm based in the U.S.

Answer 1

in case of multinational firm goods and services sold to foreign buyers and get foreign currency. so any change in the currency rate directly affects the profitability of the organization. a seller gets foreign currency so he gets benefits from the increase of foreign currency rate and vice versa. similarly, if we buy from foreign entity than increase the foreign currency rate will directly increase my payment liability hence will reduce the profits and vice verse.

for example, the cost of purchase 100 euro and the exchange rate is 1.4 per dollar payable one month later. so total payable in terms of dollar = 100 x 1.4 = $ 140.

but at the time of payment, the rate is increased to 1.45

so actual payment will be $ 145 instead of 140 and the extra $5 will reduce my total earning due to foreign currency rate fluctuation.