Introduction
For a multinational corporation such as this one, it's much easier to invest in the currency market. In the short term in[vestments, a corporation is most likely to lose more by investing in other projects within where the legal tender is its mother countries' currency. , the Company needs to take advantage of us dollar strength in the international market today. Additionally, the corporation needs to ensure that it locks out the future possibility of the dollar falling. The fall in its exchange rate may affect the investment positively or negatively in the future. Therefore, there is always a need to invest in long term forward transactions to avoid such unprecedented changes.
Investment
The best country to invest in is a united kingdom that uses euros. The euro to dollar exchange rate would work well for the Company, which would enable the Company to build more profit. There is a need to understand that using a currency that is strong that that of US will be of great benefit to the corporation in the end. The Company will be able to cash in and reap more benefits within the first six months of investment.
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The exchange rate, in this case, is 0.91 euro for one United States dollar. Arguably this fact means that for USD100000000, the Company will invest in the form of 91,000,000 UK euros. This investment will ensure that the Company is investing the money in Portugal by buying the currency. The expectation is that the interest rate of the United Kingdom bank will enable the investment to activate rise in the amount.
91/100
100,000,000 = 91, 000, 000
Arguably, it's important to consider the interest rates of both countries. This calculations will be very crucial to the determination of how viable the investment will be. In simple terms, the interest rates will enable one to find how much the corporation will spend in buying and later selling the currencies. The interest rates for Portugal is currently at 0.17% while that of America is 1.75% ( Harris & Rajgopal, 2018 )
The spot exchange rate of the euro relative to that of the US dollar is 1.221% which is the current rate of buying. Therefore to understand the forward exchange rate, there is a need to uses the two interest rates to find that the benefit will help to improve the company’s fortunes. The forward exchange rate is easy to find by multiplying the spot exchange rate to the result of the division of Portugal's exchange rate to that of the United States with additions on one ( Adams & Sumutka, 2018 ).
= 0.9449
The forward rate here, in this case, is 0.945, which will be essential in the buying of the currency. The importance of the forward exchange rate is to ensure that the Company spends less to buy currency and while investing. Therefore, this Company will be able to save the amount that would have been wasted while buying the euros in Portugal. Additionally, the Company will draw more benefits in the end. For the six months, the exchange rate will be 5.6696.
The strategy is essential for the Company as there will be proper usage of the funds that would have otherwise remained unused for the appropriate reasons. The intention to accumulate more funds in foreign currencies will also enable the corporations to plan in its financial year (Kumari & Prasad, 2019). Significantly, the investment puts the Company six months ahead, creating a plan that will ensure that there is no return of unspent monies by the department. In most cases, companies make losses by lack of appropriate expenditure (Wiseman, 2016). Lack of investment is significant as a result of the lack of sustainable projects. Some of the projects are long term, while others are a short time.
In most cases, the long term projects are more profitable, and the Company has mostly been involved in such projects. However, there is a need to get extra money through short term projects. The Company may want to avoid losses by taking up short term projects as there may be less time for proper returns in terms of profits. Arguably, there will be a high level of liquidity for the Company, which is as a result of trading in foreign currencies.
Significantly, the local market may only favor the Company in its area of trade. Therefore, the Company has to provide its products to the market to ensure a steady profit margin (Adams & Sumutka, 2018). There are no significant losses in the business as the Company will be able to buy and sell at any time that there is a need to buy. Arguably, due to the six months ability to exchange at rates that are cumulatively done in advance, there will be a manageable trend.
Additionally, the Company will be in control of the money, in this case, being the $ 100,000, 000. There can be as many transactions as possible, bearing in mind that there are various buyers (Adams & Sumutka, 2018). Through these transactions in Portuguese currency, there will be returns of more than $515, 933,600. In essence, this returns may not be possible in most of the short term investments. Such gains, therefore, show how active the trade in foreign currency is.
In conclusion, the Company should invest in foreign currency. The country of interest in Portugal as the euro is strong. The exchange rate will enable the Company to make high profits of more than twice the initial amount. Additionally, being able to account for this money is an added advantage to the Company. The corporation will be able to ensure that there is liquidity even during the period of these six months. This fact is because there is a continuous exchange, and the bank will allow buying and selling at the same time.
Reference
Adams, E. W., & Sumutka, A. R. (2018). Documenting virtual currency transactions. Journal of Accountancy , 225 (1), 8-10.
Harris, T. S., & Rajgopal, S. (2018). Foreign currency: Accounting, communication and management of risks.
Kumari, G. S., & Prasad, M. S. V. (2019). An Overview of the Foreign Exchange Market in India. Currency Risk Management: Selected Research Papers , 35.
Wiseman, S. A. (2016). Property or Currency: The Tax Dilemma behind Bitcoin. Utah L. Rev. , 417.
