\"Exchange Rate and Transaction and Translation Exposure\" Please respond to the

Question

"Exchange Rate and Transaction and Translation Exposure" Please respond to the following: Analyze the major effects that relative interest and inflation rates could have on a country’s currency. Suggest the crucial steps that a company could take in order to minimize the adverse effects of currency fluctuations. Evaluate the efficiency of two (2) of the most common currencies / foreign exchange derivatives that companies use in order to minimize translation and transaction exposure. Give one (1) example of an instance where entities such as MNCs, banks, hedge funds, and insurance companies should use each derivative. Provide a rationale for your response.

Explanation / Answer

The rate of inflation in a country can have a major impact on the value of its currency and the rates of foreign exchange it has with the currencies of other nations. Inflation generally have a negative effect on the currency. Higher inflation generally devalue the currency but however lower inflation doesnot guarnantee a stronger currency

Inflation is closely related to interest rates. Higher interest rates help in  attracting foreign invetsment which in turn increases the demand of foreign currency.Higher interest rates are in line to higher inflation. Higher inflation force central bankers to increase interest rates to contraint demand to bring inflation under control

Steps to Minimize adverse effects of currency fluctuations:-

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