IF Assignment
1) An MNC or a multinational corporation has business entities (wiseGEEK, 2013)
operating in many countries. It has its main headquarter in its home country while having
offices, factories in other countries (Investopedia, 2013). These companies set up branches
in other countries to take the relative comparative advantages those countries may
offer(International Finance Study Guide, 2013)
2) Currency exchange risks occur as the exchange rates fluctuate every second throughout
the day. MNCs often deal with large transactions in which they may need to pay or receive
large sums of money within certain period of time, exchange rate fluctuations are crucial
as they may affect the company’s earning greatly(Ayse, 2013).
a) Transaction Risks
This is the most common type of risks faced by the MNCs. MNCs deals with account
receivables, account payables and dividends. There will be a time frame between the
transaction date and the actual receive or pay out date. In between these dates there can be
fluctuations in exchange rates which will contribute to company’s profit or loss
(studymode, 2002). For example, if a Singapore company strikes a deal with an American
company today which results in one million United States dollars to be received in a
month’s time. Come to the actual paying date the following can occur:
Transaction Date USD/SGD Payment Date USD/SGD
1st Jan 2013 1.2500 Scenario One : 1st Feb 2013 1.2600 (USD strengthens against SGD)
Scenario Two : 1st Feb 2013 1.2400 (USD weakens against SGD)
Scenario One: With the strengthening of USD by 100 points against SIN, the company
profits:
SGD 1,000,000 x 0.01 = SGD 10,000
Scenario Two: With the weakening of USD by 100 points against SIN, the company loses:
SGD 1,000,000 x 0.01 = SGD 10,000
b) Translation Risks
This risk is basically involves exchange rate risks with balance sheets relating to subsidiary
companies in foreign countries. This will in turn affect the “consolidation of a foreign
subsidiary to the parent company’s balance sheet” (Michael, 2006). As a result, exchange
rate for balance sheets is used at the time of consolidation.
c) Economic Risks
It pertains to the present value of company’s future cash flow. As mentioned above, cash
flows for the company are always in future timeframe of a month or even months later, be
it the parent company or the foreign company. Thus economic trends need to be closely
observed in order to implement strategy or plans to prevent losses. It also affects the price
of imports and exports which will either make the company’s products less competitive in
