The Law of One Price - Purchasing Power Parity Assignment

The Law of One Price - Purchasing Power Parity - Assignment Example Multinational companies operating in countries such as those may be faced by risk emanating from their trade especially when there is a drawdown as well as repayment of Import/ Export Forex Loans in addition to disbursements of import/Export Bills denominated mostly in foreign currencies. Such companies will also be faced with risk emanating from Inward/Outward Remittances which are also denominated in currencies from other countries. There is also risk coming from overseas dividends that are arising from repatriating profit from overseas back home as well as operating expenses of overseas such as paying employees working in overseas. Lastly, foreign exchange risk may emanate from assets held in overseas countries such as excess cash balances of subsidiaries operating in overseas together with overseas liabilities that may result from the borrowing of foreign currency (Sharan, 2012). These fluctuations in foreign exchange rates may trigger changes in the value of the cash flows, liabilities and assets, particularly when they are denominated in foreign currencies. This means, therefore, such fluctuations may adversely affect a company’s outgoing import disbursements and incoming export funds. This is why management of foreign exchange risk is very important since it can help in minimising the risk or maximising the firm’s profit (Berg, 2010). A managed floating exchange rate is crucial for not only economic restructuring but also optimization of allocation of resources. This is because an exchange rate symbolizes price relations that exist between non-tradable and tradable goods and services. A regime of managed floating exchange rate improves the effectiveness of resource allocation, direct resources to the economic sectors that are mainly fuelled by domestic demand, for instance, the services sector, promotion of industrial upgrading, transformation of the economic pattern development, reduction of trade imbalances together with over-reliance on exports, all these stimulate economic demand to have an influential role in economic development and hence leads to promotion of balanced and sustained economic growth.