Beruflich Dokumente
Kultur Dokumente
Assignment
On
Essay Questions
By
Date
Essay Questions 2
Essay Questions:
countries resulting in transactions having exposure to the changes in the financial prices.
The fluctuations in the interest rates, exchange rates, equity prices, and commodity prices
affect the reported earnings adversely. Therefore, companies tend to seek for those
sensitivity of their main business to such changes. This making of the transaction’s nature
the changes in the financial prices, which may affect their core business adversely. An
investor would buy a stock of a company to get advantage for the management of that
company, and not from that country’s falling currency. Multinational companies also use
this to improve their competitiveness. Moreover, Multinational companies also adopt this
process in order to reduce their costs of funding and to lower their prices in the markets
The competition also forces Multinational companies to adopt and use hedging. If
some major companies are adopting risk management and are engaged in a
comprehensive hedging process, then its pushes and puts substantial pressure on the other
companies which have not adopted any hedging process to go for it. The main reason is
the difference it creates in the cost of the funding and subsequently the pricing in the
Essay Questions 3
market among the companies who have and who have not adopted risk management
2. Discuss the theories that attempt to explain changes in the foreign exchange price.
Portfolio Balance approach is one of the theories which explains the process of
exchange rate determinations with the argument that the exchange rate is a function of the
relative supplies of foreign and domestic bonds. The theory of international Fisher Effect
suggests that a specific currency exchange rate will decrease as compared to the other
currency provided the its inflation rate and interest rate is higher than the other country’s
currency. However, it is evident that in some periods the Fisher effect does not hold true.
The foreign short-term investments may get to have a higher return then what is
achievable locally. However, there is a risk of the denomination of the currency against
the home currency causing a lower return than the domestic investment in security even
The absolute form of purchasing power parity is the theory, which shows and
explains the way inflation differentials affect the exchange rates. According to this
theory, the prices of any two products in different countries should be equal if measured
in same currency. The Interest Rate Parity Theory suggests that the forward rate
(premium or discount) is equal to the difference in the interest rate between the two
concerned currencies.
The purchasing power parity is another theory, which suggests that the exchange
rate will adjust according to the time to reflect the difference in the inflation rates of the
Essay Questions 4
two countries, making the purchasing power of the consumers same for the domestic as
well as foreign goods. The relative form of the Purchasing power parity theory suggests
that the rate of price changes of the products should be to some extent similar, provided
the costs of transportations and the trade barriers are not different. However, Purchasing
Power Parity is used and considered as a valuable concept, in the real world there is
sufficient evidence of significant deviation from the theory. (Madura, 2014, pp. 242-261)
make decisions for hedging receivables, payables, capital budgeting, short and long term
financing and investments. The most used forecasting techniques are the technical
method, and mixed forecasting model. Each model of forecasting has its own criteria and
limitations and results in different forecasts based on its different forecasting criteria.
Moreover, it also depends upon the nature of the business and the market for choosing the
most favorable forecasting method. The accuracy of the results of these forecasting
forecasts with the actual values of currencies. To have a fair and meaningful result, these
comparisons should be conducted in different periods. Accuracy and bias are the two
criteria, which can be used to evaluate the performance of the forecasting methods.
changing markets with perfect accuracy, Multinational Corporations can use a specified
Essay Questions 5
interval around their estimate point forecast for better results. The interval around the
point estimate can be created from the current exchange rate volatility, the implied
figures of the standard deviation of the currency option prices, or the past time series of
volatility. This can be a better method to use for the forecasting of the exchange rates for
the Multinational corporations. Moreover, it also depends upon the nature of the business
and the market for choosing the most favorable forecasting method. (Madura, 2014, pp.
271-302)
References: