Discuss giving examples why forecasting of excahange rates i

Discuss giving examples, why forecasting of excahange rates is critical to MNC\'s decision making.

Solution

The major difference between the domestic companies and the Mnc is that MNC\'s have a world wide operation

They deal with in various countries so they use various currencies.

The forecasting of exchange rates are critical to MNC\'s decision making because exchange rates are fluctuating time to time very speedily. So MNC\'s need to predict foreign currency fluctua for the decision making of various projects. The financing decisions are based on the exchange rates. There are three types of risks in foreign exchange that are transaction risk , translation risk and economic risk. For the good forecasting a company also needs to call or take advice from experts. So cost of time and money is also needed to forecast.

The exchange rates of the currency is depend on the economic conditions of the market or nature and the market is dynamic it is changed time to time so it is critical to forecast exchange rates in decison making by MNC\'s For example a company makes a project with taking the value of dollar after 1 year is 58 so there is a profit in contract but in future spot rate is 65 of the dollar which makes the project unsound so loss comes

For the control of various exchange rates related risk we have many tools such as hedging , short term financing , risk assessment etc.