Principles of Managerial Finance, 15th Edition

19.3 Risk

1. LG3

The concept of risk clearly applies to international investments as well as to purely domestic ones. However, MNCs must take into account additional factors, including both exchange rate and political risks.

Exchange Rate Risks

Because multinational companies operate in many different foreign markets, portions of these firms’ revenues and costs are based on foreign currencies. To understand the exchange rate risk caused by varying exchange rates between two currencies, we examine the relationships that exist among various currencies, the causes of exchange rate changes, and the impact of currency fluctuations.

Relationships among Currencies

Since the mid-1970s, the major currencies of the world have had a floating—as opposed ...