Introduction to Corporate Finance

PART 5: SPECIAL TOPICS

FIGURE 17.1 AVERAGE MONTHLY YUAN EXCHANGE RATES AGAINST THE US DOLLAR AND

AUSTRALIAN DOLLAR (JUNE–DECEMBER 2010)

0.1700

0.1750

0.1650

0.1600

0.1500

0.1550

0.1450

0.1400

0.1300

0.1350

Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10

Australian dollars per yuan

US dollars per yuan

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

describe the difference between fixed

and floating exchange rates, and interpret

exchange rate quotes taken from the Web

or financial newspapers

revise the NPV decision rule for capital

budgeting analysis to incorporate the added

complexity that arises when an investment is

undertaken in a foreign currency.

LO17.1 LO17.2

Walk down the aisle of a grocery store, visit a

shopping mall, go hunting for a new car or check

the outstanding balance of your credit card. In

each of these activities, chances are that you will

be dealing with products and services provided

by multinational corporations (MNCs), businesses

that operate in many countries around the world.

In recent decades, international trade in goods

and services has expanded dramatically, and so

too have the size and scope of MNCs. Although

all the financial principles covered in this text thus

far apply to MNCs, companies operating across

national borders also face unique challenges.

Primary among them is coping with exchange rate

risk. An exchange rate is simply the price of one

currency in terms of another, and for the past 30

years, the exchange rates of most of the world’s

major currencies have fluctuated daily. These

movements create uncertainty for companies that

earn revenues and pay operating costs in more

than one currency. Currency movements also

add to the pressures faced by wholly domestic

companies that face competition from foreign

companies.

multinational
corporations (MNCs)
Businesses that operate in
many different countries

exchange rate
The price of one currency in
terms of another currency

Source: Oanda Corporation, http://www.oanda.com/ currency/historical-rates/.