Question

1. Why and how do exchange rates influence corporate investment decisions? Corporate financing decision

Answer 1

The exchange rate influences corporate investment decisions through the following:

1) Change in exchange rates affects the import and export activity of the country. When the currency depreciates, the imports of the products become costlier while the exports become cheap.

2) Depreciation of the currency leads to a lower value of the foreign assets on the balance sheet. This weakens the balance sheet of the parent company.

3) Depreciation of the foreign currency also lowers the net present value of the project in terms of the parent's currency.