Essay On Financial Risk Faced By Mncs

In today’s global economy many multinational corporations (MNCs) are investing or operating their company internationally to maximize their profits. Operating in other countries comes with various risks faced by MNCs. One of the risk is the financial risk involved with the foreign currency exchange markets. Many of the MNCs deal with more than one national currency and hence the changes in the foreign currency exchange rate can have an adverse effect on the Corporation’s profits. This paper will examine the various foreign exchange currency risks and accounting issues faced by MNCs and what they can do to manage this risks.
One of the risk MNCs faced is the finance risk involved with a foreign exchange market, specifically transaction
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The issues MNCs deals with is how to account for the value difference if the domestic-currency value decrease with the changes. According to the book, both IAS and FASB requires companies to use a two-transaction perspective in accounting for foreign currency transactions. This view treats the export sale and subsequent collection of cash as two separate transaction. Any difference of what the actual amount received and the amount recorded on the first transaction when the sale was made, is a result of a foreign exchange gain or loss that must be reported separately in the income statement.
Moreover, the foreign exchange gain or losses should be revalued at the balance sheet date to account for the changes in exchange rate. For any foreign exchange gain or losses that have not yet been realized, the FASB and IAS 21 requires that companies should report unrealized foreign exchange gains and losses in net income in the period which the exchange rate changes. This is consistent with accrual basis
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Hedging will help reduce the risk involve with transaction exposure. By hedging corporation can use foreign currency derivatives to hedge against the effect of the changes due to the fluctuation of the exchange rate. This can help guard their assets from future losses and it’s a way to ensure that its cash flow do not fall below the necessary minimum. One type of hedging is called the purchase option. According the International Accounting book, this option gives buyer the right, but not the obligation to exchange currencies at a predetermined rate (Doupnik, 2015). Another type of hedging is forward contracts. This contracts is a binding agreement to exchange currencies at a predetermined rate. Corporations can lock in the rate at a price where they can sell their foreign currencies it receives in future

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