Financial managers of MNCs need to understand factors that i

Financial managers of MNCs need to understand factors that influence exchange rates so they can anticipate the effects of exchange rates on their cash flows. So what are the factors that influence exchange rates?

Solution

There are many factors whcih can influence exchnage rates,

1. Inflation- Lower inflation makes domestic goods more in demand, and it improves export as it makes foreign goods less competitive. and Thus helps domestic currency to appreciates.

2.Intererst rates- Higher Interest rates attracts people from all other counries to invest in them, which consequently increases the demand on the currency and hence helps the curreny to appreciates and Opposite to than lower interest rates depricates the currency

3. Governement/Central Bank:- It also affects the exchange rate in both diections as central bank of most of the countries buy or sell their currency to influence their exchange rates

4. Current account Deficit:- This means a country is spending more on forein trade than earning through capital from foreign which makes their currency depriciate

5. Government Debt:- Higher Debt makes the investors think that chances of default is also high which makes the country less attractive to the foreign investors thus currency depricates

5. Speculation- Exchange rate are very much influnced by speculation as the rate is outcome of Demand and Supply of any currency . and this demand is very much dependend on speculation