comment and reply

“comment and reply on the following three sources, 100 words for each.

1. The dollar at the current moment is quite strong and with the election coming to close many people would like to keep the price of the dollar up in order to keep the economy up and running. However, if the trade war is kept up that might change very quickly for everyone.  This will also impact the cash flows of MNC’s, as a man of the software companies are of foreign country branches and this will result in an increase of cash balances in dollars. On the other hand, cash inflows for MNC’s will be lowered as the get less US dollars when foreign currencies are exchanged and cash outflows will be increased as they will get more cash in foreign currencies when Us dollars are exchanged. 

2. I suspect the question posed may be outdated since the presidential election is, of course, upon us this year. The US dollar becomes more volatile during presidential elections due to the uncertainty of the outcome. Monetary policy agendas are often split where republicans prefer to tighten spending, decrease national debt and encourage private sector jobs whereas democrats often support public works and job creation, universal healthcare and other spending initiatives that can increase debt. Because of this, the US dollar will often react to whomever wins the presidency during an election year. However, because there are a great number of factors effecting the value of the US dollar, slumps or rallies tend to be short-lived after an election. Additionally, initial exchange rate reactions to a proposed change in monetary policy may not always stick since oftentimes these policies change or do not have the outcome some may have expected. Multinational corporations expecting a decline in the US dollar might consider hedging its receivables. An expected appreciation would probably be met with hedging payables. Cash flow timing adjustments can also provide MNCs with a means to avoid adverse effects to inflows and outflows during a period of uncertainty. 

3. FX rates, or floating exchange rates, relate to the value of two currencies against one another. Given that we are in the year of presidential elections, it is important to look at the various implications behind the political changes, or lack thereof.
Pushing for more protectionist trade policies will affect the floating exchange rate between the US and other countries. The Mexican Peso fell by nearly 10% in the beginning of May when President Trump had a higher approval rating1. Along with this, a continued trade war with China will also lead to a decline in the currency of the Yuan2. JP Morgan however has publicly stated that a Biden presidency would provide a diplomatic approach to foreign policy that would reduce volatility. The company has also stated that they believe he would be a “neutral to slight positive4” for the equity market. While the presidential debates themselves can have a great effect on exchange rates, it would seem that either party would back fiscal policy to stimulate our economy, whether that be through quantitative easing or raising interest rates. These methods of increasing our currencies value may also increase the level of inflation and may detract foreign investment. It is also possible that interest rates will be lowered as a way to encourage foreign investment.
It is important for MNC’s to monitor any ongoing changes in exchange rates in order to better prepare themselves for unfavorable future outcomes. MNC’s may face a decrease in cash flows from foreign investment due to the increase in interest rates. Stimulation of the economy through the creation on new monies could increase inflation rate which would hurt an MNC’s buying power. If interest rates are lowered, MNC’s will experience greater foreign investment.”

comment and reply

“comment and reply on the following three sources, 100+ words for each.

1.   When operating internationally a major risk for companies does occur especially a foreign exchange risk. A CEO can limit the FX risk by utilizing forward contracts, along with currency derivatives and interest rate derivatives. The forward contract allows the contract between the two parties to buy or sell a particular asset at a certain price sometime in the future, hence the name “”Future contract””. The currency derivatives are utilized to reduce the amount of risk that happens from the exchange rate shifts and fluctuations. They are mainly used for hedging and CEOs can use the currency futures and options to further minimize the risk involved.  The most commonly used would be interest rate derivatives they are used for hedging as well against the fluctuations in interest rates of different countries. 

2.It is first important for the CFO to determine how the firm is affected by exchange rate movements through analysis of all cash flows and their various impacts as a result of exchange rate movement scenarios. Utilizing the regression model allows the CFO to compartmentalize the exposure and pinpoint which units or areas of the business have cash flows that are most correlated to the movement of exchange rates. This will ensure that the areas most in need of attention receive it. Next, the CFO must understand the precise reasons behind the statistical results and make organizational adjustments as required to hedge the risks.  This may involve changing pricing policies, restructuring, foreign financing, hedging using forwards, futures or options or even adjusting operations in other units to offset exchange rate movements that result in a reduction in cash flows. For each proposed viable strategy, the CFO should project cash flows at several exchange rate scenarios in order to determine which option optimizes cash flows most effectively.

3. There are numerous steps CFO’s can take in order to reduce the potential impact on cash flows from substantial political changes. One method of doing so involves restructuring operations to reduce economic exposure. This can be done by shifting sources of revenue or expenses to match cash inflows and outflows in foreign currencies. This way, a lesser percentage of a company’s revenues will be at risk of adverse FX movements. CFO’s can also utilize derivative contracts to hedge against inflation risk, such as futures contracts and forward contracts. This ensures that the MNC has a guarantee of a certain asset or commodity at a specified amount at a specified date.
If a foreign currency has a greater impact on cash inflows than outflows, a prudent CFO may consider pricing foreign sales in the MNC’s local currency, increasing foreign supply orders, and/or restructuring debt to increase debt payments in foreign currencies. All of these actions allow an MNC to deal with foreign currencies, rather than having to convert capital to the domestic currency where adverse exchange rate movements can lower the amount of capital being recognized. If a foreign currency has a greater impact on cash outflows than inflows, a CFO may consider increasing foreign sales, reducing foreign supply orders, and/or restructuring debt to reduce debt payments in foreign currency.
Firms can reduce economic exposure by reducing foreign sales, but that could reduce potential cash flows. Firms should instead seek to restructure their business so that existing interests are maintained while reducing the mismatch between cash inflows and cash outflows in each foreign currency over a period of time. An example of such restructuring can involve opening production facilities in foreign countries, but this can only be done if the MNC maintains substantial cash inflows in a foreign currency and cash outflows in the domestic currency.”

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