Which exchange rate forecast technique should MNCs use?

Business & Finance
Tutor: None Selected Time limit: 1 Day

Read and think about both sides of the issue. I would like for you to pick one side or the other, support your position with online articles (either academic or popular press).

POINT: No. The present value of an MNC’s cash flows is based on the cash flows that the parent receives. Any impact of the exchange rates on the financial statements is not important unless cash flows are affected. MNCs should focus their energy on assessing the exposure of their cash flows to exchange rate movements and should not be concerned with the exposure of their financial statements to exchange rate movements. Value is about cash flows, and investors focus on value.

COUNTER-POINT: Investors do not have sufficient financial data to derive cash flows. They commonly use earnings as a base, and if earnings are distorted, so will be their estimates of cash flows. If they underestimate cash flows because of how exchange rates affected the reported earnings, they may underestimate the value of the MNC. Even if the value is corrected in the future once the market realizes how the earnings were distorted, some investors may have sold their stock by the time the correction occurs. Investors should be concerned about an MNC’s translation exposure. They should recognize that the earnings of MNCs with large translation exposure may be more distorted than the earnings of MNCs with low translation exposure.

Jun 17th, 2015

Thank you for the opportunity to help you with your question!

cash flow will be affected when the cost of goods changes and when there is availability of customers who are able and willing to buy goods and a specific time.

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Jun 17th, 2015

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