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For firms engaged in international lending and borrowing,
(A) swings in exchange rates
(B) trade-offs and risks
© foreign portfolio investment
(D) foregn direct investment
(Dave an enormous effect on profits.
( Listen

Ask by Newton Nguyen. in the United States
Mar 30,2025

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Answer

Swings in exchange rates have a significant impact on the profits of firms involved in international lending and borrowing.

Solution

We begin by considering that a firm involved in international lending and borrowing deals with multiple currencies. The exposure to different currencies means that changes or fluctuations in exchange rates can alter the value of the assets and liabilities denominated in these currencies.
  1. Suppose a firm borrows in a foreign currency. If the exchange rate between the firm’s domestic currency and the foreign currency changes, then the cost of repaying the loan in domestic terms will change. We can express the domestic cost as
    where is the exchange rate (domestic currency per unit of foreign currency) and is the loan amount in foreign currency. A swing in has a direct effect on .
  2. Similarly, if a firm lends money internationally, the foreign investor’s repayment around exchange rate fluctuations might affect the firm’s income when converting back to the domestic currency.
  3. In both cases, the profit can be affected significantly by the exchange rate swings. Even when the underlying principal amounts are sound, the profitability can change dramatically due to the factor .
Given the choices:
  • (A) Swings in exchange rates
  • (B) Trade-offs and risks
  • © Foreign portfolio investment
  • (D) Foreign direct investment
The enormous effect on profits comes primarily from the variation in exchange rates. Thus, the factor in question is:

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Beyond the Answer

Swings in exchange rates can greatly impact a firm’s profitability in international lending and borrowing. When currencies fluctuate, the value of repayments can change dramatically, making it either more expensive or less costly for borrowers to pay back loans. This volatility can lead to unexpected losses or gains, ultimately affecting the bottom line for both lenders and borrowers.
Additionally, managing trade-offs and risks is crucial in international finance. Firms must balance potential high returns from foreign investments with the risks of political instability, economic downturns, and varying regulatory environments in different countries. By effectively assessing these factors, companies can minimize risks and maximize their international financial success.

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