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G730 Multinational Firms And Exchange Rate Fluctuations.edited.edited

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Running head: MULTINATIONAL FIRMS AND EXCHANGE RATE FLUCTUATIONS 1
Multinational Firms and Exchange Rate Fluctuations
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Institution Affiliation
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MULTINATIONAL FIRMS AND EXCHANGE RATE FLUCTUATIONS 2
Introduction
Investors who operate international and domestic firms are faced with various risks in their
daily operations. One major risk that faces international firms is fluctuations in exchange rates,
making firms to incur losses. If a firm acquires some products to be paid later, any change in the
exchange rate will affect the business either positively or negatively. When the value of currency
depreciates, businesses that import products are negatively affected, while those that deal with
exports are positively affected (Keat, 2013). Therefore, investors need to make use of economic
tools when making business decisions.
My advice to a US importer expecting the dollar to weaken
To help a US importer who expects the US dollar will weaken during this period, and owes
500,000 Euros to be paid in 30 days to a Belgian company, I would advise the importer to consider
using one among the following options. First, the importer can use a forward contract, where the
importer would get into an agreement with the Belgian company, agreeing on the exchange rate to
be used when making payment. This would enable the US importer to stabilize business
operations, as he/she will not have to pay more due to the depreciation of the US dollar. Forward
contracting is important because it ensures that it balances losses and profits of traders located in
different countries due to changes in exchange rates (Bash, Al-Awadhi, Al-Abdulhadi, Al-Ibrahim,
& Al-Ali, 2018).
The other thing that the importer can use is currency options, which would help the
importer have the right to decide whether to sell or buy currency at a certain exchange rate. This
will help the importer to avoid making paying using the exchange rate after the US dollar weaken.
Currency option involves buying premiums, which allows a trader to decide whether to take the

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Running head: MULTINATIONAL FIRMS AND EXCHANGE RATE FLUCTUATIONS Multinational Firms and Exchange Rate Fluctuations Name Institution Affiliation Date 1 MULTINATIONAL FIRMS AND EXCHANGE RATE FLUCTUATIONS 2 Introduction Investors who operate international and domestic firms are faced with various risks in their daily operations. One major risk that faces international firms is fluctuations in exchange rates, making firms to incur losses. If a firm acquires some products to be paid later, any change in the exchange rate will affect the business either positively or negatively. When the value of currency depreciates, businesses that import products are negatively affected, while those that deal with exports are positively affected (Keat, 2013). Therefore, investors need to make use of economic tools when making business decisions. My advice to a US importer expecting the dollar to weaken To help a US importer who expects the US dollar will weaken during this period, and owes 500,000 Euros to be paid in 30 days to a Belgian company, I would advise the importer to consider using one among the following options. First, the importer can use a forward contract, where the importer would get into an agreement with the Belgian company, agreeing on the exchange rate to be used when making payment. This would enable the US importer to stabilize business operations, as he/she will not have to pay more due to the depreciation of the US dollar. Forward contracting is important because i ...
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