Question

Describe the major exchange rate risk related factors that multinational businesses or corporations should consider when conducting business globally.

Answer 1

Solution:

There are three major risks associated with the foreign exchange that any corporation should consider when doing business globally-

1. Transaction Risk: Transaction risk, as the name suggests is the risk associated with the purchase or account receivable in a different currency. eg. The US firm is purchasing from Germany and the Euro is used for the transaction.

2. Economic Risk: This risk is due to the fluctuations in the exchange rate that will change the market value of the company.

3. Translational Risk: This risk happens due to the fact that when financial statements are made then the items in financial statements fluctuate due to the exchange rate. When a multinational organization has a subsidiary abroad and when financial statements are prepared then the financial statements of the subsidiary are converted to the operating currency and the exchange rate plays an important role.