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Finance - International Business

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Finance - International Business

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  • Jan. 2006
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How Changes in Exchange Rates and Interest Rates Affect Costs and Prices of Firms Operating in International Markets?

What Effect These Changes Might Have On A Multinational Corporation Decision To Invest Globally?

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How Changes in Exchange Rates and Interest Rates Affect Costs and Prices of Firms Operating in International Markets? What Effect These Changes Might Have On A Multinational Corporation Decision To Invest Globally?

Abstract
Changes in interest and exchange rates directly affect profitability of companies having international business by influencing their investment decisions, production costs and prices. High interest rates are associated with higher business risk and make cost of capital more expensive, thus reducing profitability and amount of business investments in the region over a long-run period. On the other hand high interest rates are positively related to short-term exchange rates due to increased demand of the national currency. This results in higher prices of exported products and services, followed by decrease in exports, and increase in imports. Businessesf investment decisions for international markets are thus influenced not only by current interest and exchange rates, but also by expectations for future developments. The purpose of this analysis is to give a justified explanation of the effect of those changes.

Currency exchange rates
The driving force of international currency exchange markets are businesses, people and financial institutions that either speculate with exchange rates or are involved in international commerce. The exchange rate is the price of one countryfs currency in terms of another countryfs currency (Ross, A. et al, (year?)). Few countries fix the exchange value of their currency to other key currency such as US dollar or the euro. The exchange rate between most currencies is usually determined by market forces of supply and demand. When for example the UK pound...

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