Exchange Rates: MNC Pros/Cons
Exchange Rates: MNC Pros/Cons
(Exchange Rates: MNC Pros/Cons)
How fluctuating exchange rates can be beneficial to mncs and how they can affect mncs negatively
Please review the lecture notes for chapter 19 and give a qualitative example of each of the following: How fluctuating exchange rates can be beneficial to MNCs and how they can affect MNCs negatively. You must give one example of each scenario in order to receive full credit for this question. Furthermore, your answer must be purely qualitative. In other words, you should not use any numerical data to answer this question.
(The question from Ch. 19, pertaining to fluctuating exchange rates, is somewhat subjective and so you may not be able to find the answer to that question in either the lecture notes or the textbook. You might need to do an Internet search on the topic in order to answer it. Anybody who has ever traveled internationally has dealt with exchange rate fluctuations. If you have a personal story to share regarding fluctuating exchange rates, you may feel free to do so. Finally, please note that your answer to this question must be strictly qualitative; you are not required to show any calculations.)
Exchange Rates: MNC Pros/Cons
Fluctuating Exchange Rates: Benefits and Drawbacks for MNCs
Beneficial Scenario
Fluctuating exchange rates can benefit multinational corporations (MNCs) when their home currency weakens relative to the currencies of the markets where they operate. For example, consider an MNC based in the United States that exports goods to European markets. If the U.S. dollar depreciates against the euro, the company’s products become more affordable to European customers. This can lead to an increase in sales volume and market competitiveness in the European region. Additionally, the company will receive more dollars when converting its euro-denominated revenues back into the weaker home currency, effectively boosting its profitability without altering its pricing.
Negative Scenario
On the other hand, fluctuating exchange rates can negatively affect MNCs when the home currency strengthens against foreign currencies. For instance, if a U.S.-based MNC has operations in Japan and the Japanese yen weakens against the dollar, the value of its earnings from the Japanese market decreases when converted back to dollars. This can reduce the company’s overall profitability. Furthermore, the stronger dollar makes the MNC’s products or services more expensive for Japanese consumers, potentially leading to a loss in market share due to decreased affordability.
Personal Insight
An international traveler might experience a similar dynamic: purchasing power abroad increases when their home currency strengthens but diminishes when it weakens. For MNCs, these fluctuations magnify on a larger scale, impacting revenue, costs, and strategic decisions.
By understanding and strategically hedging against such fluctuations, MNCs can mitigate risks and capitalize on favorable conditions.
