Purchasing Power Parity: A ‘must have’ tool in a multinational enterprise’s toolboxTools Bohlouli Ghashghaee, Bijan (2013) Purchasing Power Parity: A ‘must have’ tool in a multinational enterprise’s toolbox. [Dissertation (University of Nottingham only)] (Unpublished)
AbstractMultinational corporations (such as E.ON) are exposed to foreign exchange risk due to the nature of their business model (operations outside their home country). The extent of the exposure has proved to be significant over time as expected and unexpected fluctuations in bilateral exchange rates affect their cash flows, earnings and their market value (as perceived by markets). In addition to that, multinational firms’ competitiveness in overseas markets are also strongly influenced by exchange rate movements as adverse movements in exchange rates may lead to the loss of competitive advantage (and vice versa) in targeted overseas markets. In order to limit the uncertainty caused by the volatility of bilateral exchange rates in foreign exchange markets, MNCs tend to adopt various hedging strategies (financial hedging is known to be one of the most commonly adopted strategies of minimizing the foreign exchange exposure). The use of currency derivatives (financial hedging instruments) could mitigate MNC’s exposure to the FOREX but it may prove to be costly and destructive if used blindly since the complexity of these financial hedging derivatives have raised so much that made them hard to understand.
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