Exchange Rates and Interest Rates

EXCHANGE RATES AND INTEREST RATES 3

ExchangeRates and Interest Rates

ExchangeRates and Interest Rates

Moreoften than not, multinational corporations seek to expand intocountries that have low interest rates as that would mean higherprofits and sustainability for them. However, this rule may besubverted in instances where the exchange rates risks are too high.In the case of countries such as Switzerland, the interest andexchange rates are controlled by the government rather than marketforces, unlike the case of others such as Brazil where the interestand exchange rates are determined by international investments andtrade. Government intervention means that the multinationalcorporations stand to have their profitability limited (Levich,2001).

Thecountries that are under consideration in the project are Japan andEurope. As much as the two countries have pretty stable markets, itis noted that they vary with regards to their currency and interestrates. The currency rates of the euro are higher than that of theUnited States, in which case much more would be required so as toinvest in Europe. The stronger currency, however, comes with immensestability in the long-term, with the market being the maindeterminant of the same. In the case of Japanese market, it is notedthat the Yen is much weaker than the dollar, in which case investorwould require much less so as to invest in the country (Levich,2001).However, it is worth noting that the Japanese government plays acrucial role in determining the interest rates of the country andmaintain a semblance of stability in the long-term. This, therefore,introduces some element of rigidity given the fact that themultinational corporation would never really take advantage of marketforces of demand and supply so as to make a profit. Essentially, itwould be preferable that it invests in Europe.

Reference

Levich,R. M. (2001).&nbspInternationalfinancial markets.Boston: McGraw-Hill/Irwin.