BRD21 - Chapter 21 Discussion Questions 21-1. What risks...

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Chapter 21 Discussion Questions 21-1. What risks does a foreign affiliate of a multinational firm face in today’s business world? In addition to the normal risks that a domestic firm faces (such as the risk associated with maintaining sales and market share, the financial risk of too much leverage, etc.), the foreign affiliate of a multinational firm is exposed to foreign exchange risk and political risk. 21-2. What allegations are sometimes made against foreign affiliates of multi-national firms and against the multinational firms themselves? Some countries have charged that foreign affiliates subverted their governments and caused instability for their currencies in international money and foreign exchange markets. The less developed countries (LDC’s) have, at times, alleged that foreign business firms exploit their labor with low wages. The multinational companies are also under constant criticism in their home countries. The home country’s labor unions charge the MNC’s with exporting jobs, capital, and technology to foreign nations, while avoiding their fair share of taxes. In spite of all these criticisms, the multinational companies have managed to survive and prosper. 21-3. List the factors that affect the value of a currency in foreign exchange markets. Factors affecting the value of a currency are: inflation, interest rates, balance of payments, and government policies. Other factors that have an influence include the stock market, gold prices, demand for oil, political turmoil, and labor strikes. All of the above factors will not affect each currency in the same way at any given point in time. 21-4. Explain how exports and imports tend to influence the value of a currency. When a country sells (exports) more goods and services to foreign countries than it purchases (imports), it will have a surplus in its balance of trade. Since foreigners are expected to pay their bills for the exporter’s goods in the exporter’s currency, the demand for that currency and its value will go up. On the other hand, continuous deficits in balance of payments are expected to depress the value of the currency of a country because such deficits would increase the supply of that currency relative to the demand. Of course, a number of other factors may also influence these patterns such as the economic and political stability of the country. S21-1
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21-5. Differentiate between the spot exchange rate and the forward exchange rate. The spot rate for a currency is the exchange rate at which the currency is traded for immediate delivery. An exchange rate established for a future delivery date is a forward rate. 21-6. What is meant by translation exposure in terms of foreign exchange risk?
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BRD21 - Chapter 21 Discussion Questions 21-1. What risks...

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