Foreign Exchange Assignment Help Foreign Exchange Aspects As per Forex assignment help experts, There are various aspects of foreign exchange such as risks, exchange rates and options that can affect the financing for MNC to establish a plant in Latin America. Some of them are discussed below – Foreign Currency Risk: It is a type of financial risk that arises due to unexpected changes in the exchange rates between two countries. In this case, the MNC is the UK based company which plans to make foreign investment in Latin America (for example in Brazil) to establish a plant. So, the company should need to consider variation between Pound Sterling and Brazilian Real to protect their investment from currency risk. It is because; fluctuations in the value of currencies can directly impact foreign investments due to rising domestic currency as compared to foreign currency.
Hedging: It is a risk management strategy that is useful to reduce or control risk of adverse movement in exchange rates by taking an offset position in the futures market. Hedging is an important aspect of foreign exchange or foreign investment, so the MNC should need to hedge foreign exchange. It is because; hedging can be helpful for the company to minimize foreign currency risk or foreign exchange exposure by using currency futures, currency options, future contracts etc. Additionally, hedging of foreign exchange can be also useful for the MNC to protect their investment against effects of inflation and interest rates in foreign country. Along with this, after establishing the plant in Latin American country, the operating costs, labor costs, cash flows, and revenue will dominate in foreign currency (in Brazilian Real), so in this situation, the MNC can need to hedge foreign exchange against foreign exchange rate fluctuations.
Foreign Exchange Instruments There are different kinds of foreign exchange instruments including traditional FX instruments and derivative instruments that can be helpful for MNC to protect its investment from foreign exchange exposure. Following are some of the types of foreign exchange instruments that the MNC should use during financing a plant in Latin America.
Currency Option Contract: The management of the firm should utilize currency option contract to hedge foreign exchange. Under this instrument, there are two types of options such as call option and put option that are available for the MNC to minimize foreign exchange risk. A call option provides the right to purchase underlying currency, while put option provides the right to sell underlying currency at a specific price and a specific period of time. In this case, put option can be useful for the MNC to hedge future receivables that it will receive after establishing the plant in Latin America.
Forward Contract: Forward contract is also an instrument that can assist the company to minimize foreign exchange exposure. It is an agreement between a corporation and a financial institution to exchange specified amount of one currency for another at a specified exchange rate on a specified future date. In order to safely finance a plant in Latin America, the MNC should develop a forward contract with a bank to purchase foreign currency at a specified exchange rate to provide finance. Along with this, forward contract can be useful for the company to hedge foreign exchange as well as receivables and pay ables. The MNC should utilize both of these foreign exchange instruments to minimize foreign current risk and to hedge future receivables and payables.
Importance of Government Regulations The MNC have to be aware about government regulations of Latin American country before establishing the plant to protect their earnings and cash flows. In this way, top management of MNC should know about foreign direct investment (FDI) regulation, taxation policy, monetary policy, labor laws, property acquisition laws to establish plant, foreign exchange regulations etc. The awareness of all these regulations can help the management to avoid potential problems as well as negative impacts on future earnings and cash flows. Along with this, the MNC can protect its foreign investment by reviewing all these laws (Graham, 2007).
Awareness of Interest and Inflation Rate In the case of business expansion in foreign market, there is a need that the firms should be aware about inflation and interest rates of both domestic and foreign country due to impact on exchange rates. Similarly, the MNC should be aware about interest rate and inflation rate of UK and Brazil because of potential impact on exchange rate between Pound Sterling and Brazilian Real. It is because; the changes in inflation rates can affect international trade activity of Latin America that influences supply of currency as well as exchange rate. At the same time, changes in interest rates of Latin America can affect investment in foreign securities or currencies that influences exchange rate. All these things show that there is need to be aware about inflation and interest rates.
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