Advantages And Disadvantages Of A Multinational Corporation Finance Essay

Advantages And Disadvantages Of A multinational muckle Finance tryThe entities which atomic number 18 operating in more than unmatched country be c onlyed Multinational Corporations. The typical Multinational Corporation functions with a headquarter in iodin country while an another(prenominal)(prenominal) facilities are found in other countries. Multinational Corporation is similarwise referred to transnational corporation. The model of the Multinational Corporation may vary but its simplest abidance is maven that is headquarter in one country and its working units in other countries. Its main reason is that companies nominate advantage of reducing cost for the production of goods and also for the services.Its another form is that all main functions are performed in the origin country of cite comp all and subsidiaries are less function independently. The start of much(prenominal) phase of line is traced is truly old near about 17th degree centigrade but in the 21st century. Multinational Corporation also coifs in existence collectable to merger of different companies in different countries.Advantages of Multinational CorporationThere are many different reasons why a high society practices as a Multinational Corporation. These reasons are given at a lower placeMultinational companies stinkpot avoid or reduce their transportation cost.Economies of outstrip also can be achieved.Multinational companies have less risk of bankruptcy than small or non-multinational companies.Research and development process is also more in practice.Wage level in different countries is different, which is a major advantage.Due to globalization, different markets are available.Currency FluctuationsCurrency variant is referred to the heightens of a relative value in one money when compared to other country. The process of cash fluctuation is chokering every day which brings changes in respect of transpose of different currencies of different countrie s. It is the money fluctuation which attracts is investors to invest in different currencies for gaining the profit. There are upward or d avouchward straw man in the currencies that refers to appreciate or depreciate of currencies. If an investor invests in a capital if that currency depreciates in accordance to investors own currency and so thither is a profit while if that currency appreciates in accordance of the investors own currency thusly in that respect is a loss. Political issues may feature the currency fluctuation. If there are political issues of currency fluctuation there will be short term impact also it may be long term.What is FOREX ( immaterial mass meeting)? unconnected replace is commerce of one theatrical role of currency for another. Foreign change over has no physical location and no central change same(p) other financial markets. It ope accounts through a global network of banks, corporations and individuals trading one currency for another. Th e abroad exchange market is the worlds largest financial market which works 24 hours in a day which trades a abundant amount of currencies of different countries. Not like any other financial market, investors can counter to currency fluctuations caused by frugal, political and social events at the time when they occur, without having to wait for exchanges to open. The currency markets are not new that they have been around for as long as banks have been established for the dealing and traffics of money. What is relatively new is the receptivity of these markets to the individual investor, mainly the small- to medium-sized trader.A Short History of the Foreign Exchange Trading grocery storeForeign exchange markets mainly established to set out easy cross border trade in which there is closeness of different currencies by governments, companies and individual investors. More ever these markets generally existed to cater for the international movement of capital and money, ev en the initial markets had speculators. Today, a slap-up part of Foreign Exchange market working is being find by assumption, arbitrage and professional dealing, in which currencies are traded like any other commodity. The Retail Investors only means of gaining contact to the foreign exchange market was through banks that transacted in a huge amount of currencies for technical and speculation purposes. After exchange rates were allowed to float freely in 1971, the volume of trade has been increased over the time. Most of the worlds major currencies were pegged to the US dollar due to an agreement that is called the Britton Woods Agreement. The participating countries try to keep on the value of their currencies against US Dollar also with the rate of the gold. These countries are leap to devalue their currencies for the purpose of gaining advantage.Types of markets and transactionsThere are two types of markets or transaction which are very common.Spot market / spot transaction Forward market / forward transactionsIn spot transactions, purchasing and selling certain amount of foreign currency are based on current market rate and settlement are do and paid for without more ado. On the other hand, Forward transactions, are deals lay for future settlement, to be paid for on decided dates on or by and by delivery.Characteristics of Foreign Exchange MarketThere are any(prenominal) characteristics of Foreign Exchange Markets such asVolume of trading is very huge.By the use of technologies like internet the foreign exchange trading centers are linked together to get updated information and for the trading.Due to the integrating of trading centers there is no significant arbitrage.Functions of Foreign Exchange MarketsWhat good-hearted of functions of Foreign Exchange Market performs are give below manoeuver of purchasing power.Financing of inventory in transit.Hedging.Conversion of currencies.Reducing of foreign exchange risks.Participants of the Foreign Ex change MarketThere are the participants of the Foreign Exchange Markets those participates in dealing and transactions.Banks Foreign Exchange Dealers.Individuals Firms.Speculators Arbitrageurs.Central Banks Treasuries.Foreign Exchange Brokers.Foreign Exchange minutes AdvantagesThe advantages of the foreign exchange transactions are such asCommission Free Transaction involve TransactionsRound the Clock MarketLeverage (huge investment refers to huge profit)Highly LiquidFree online informationForeign Exchange Transactions DisadvantagesThere are some disadvantages of foreign exchange transactions such asLeverage (huge investment refers to great loss)Brokers (inexperienced, unfaithful)Spreads (broker generally quote a fixed spread)Role of Foreign Exchange Markets in the Global Market PlaceExchange rateForeign currency denominated financial cockExchange rate is referred to that how much units of one currency are needful to purchase the one unit of other currency and foreign exchang e denominated financial instrument is referred to bond, stock or a bank fixate whose value is denominated in the currency of another country. When you carry out business in a foreign country, you will have to exchange currencies relate at some existing exchange rate. The price of one countrys currency in terms of another country is called the exchange rate. When the currency of one country drops in value there will be an same appreciation of value in another countrys currency. Depreciation (devalue of currency) occurs when it takes more currency to purchase the currency of another country. Appreciation (increase in value of currency) is in force(p) the opposite the currency is able to purchase more units of the other countrys currency. Since well-nigh currencies are esteemed according to the market, commonly there are changeless changes to exchange rates.Foreign Exchange RisksForeign exchange risk is usually defined as Multinational Corporation faces variability in their curr ency values of assets, liabilities and operating income due to the unexpected currency fluctuation. That variability can be reduce or eliminate partially or fully. categorization of scenesThere we can classify the Foreign Exchange pictorial matters in terzetto types such asTransaction exposuresedition exposuresEconomic exposuresAll these exposures individually affect the outcome of the business. How these exposures affect a business now we take hold of individually all these exposures.Transaction ExposureTransaction risk occur when any company grooms trade, borrows, lend and sell the fixed assets of its subsidiaries company all these operations takes lot of time so during that time when times come for the payment then there is real change of exchange rate so it refers to the Transaction Exposure.Let see an example, a Pakistani importer pick out a deal for the some kind of commodity with United States suppliers after the delivery when time comes for payment if the importer pa ys in local currency (PKR) then the United States supplies is at risk, if the payment is in foreign currency (USD) then the importer is at risk. Usually in this case exporter is at risk of exchange rate risk because supplier quotes the price in buyers currency.Translation ExposureTranslation risk have to face when a parent company making its financial statements in its local currency. Because when consolidating the earnings, liabilities and assets of the subsidiaries company to the local currency then the exchange rate has changed, due to this exchange rate change the value of that asset when acquired has changed same to liability and earnings. Financial statements have to make in a single local currency for the stakeholders. Subsidiaries companies value (assets, liabilities, earnings) is shown in financial statements in local currencies at current exchange rate.Translation exposure depends upon the translation method. There are two common methods are used for the translation such a sCurrent / non-current methodpecuniary / non-monetary methodIn current / non-current method current assets and liabilities are translated at current rate (closing rate at the time of making residual sheet), while non-current assets and liabilities are translated at the historical rates (the rate when asset was acquired and the liability incurred). According to this method only current assets and liabilities are undefended to currency fluctuation.In monetary / non-monetary method the monetary assets and liabilities are translated at the current rate while the non-monetary assets an liabilities are translated at the historical rate. In this method monetary assets and liabilities are exposed to currency fluctuation.Economic ExposureThe change in the present value of a company due to change in future cash flows which caused by the fluctuation of the exchange rates. Cash flows can be classified in to two types like cash flows due to contractual commitment and the cash flows due to pas s judgment future transactions. Every transaction exposure is included in the economic exposure.Let see an example, when the cost of a Multinational Company incurs in one currency and its sales generated in other currency so, the free-enterprise(a) advantage of the Multinational Company is affected by the change in exchange rate. Simply profit of the Multinational Company can light if the cost currency appreciates and