The paper "Corporate Finance Issues" is a perfect example of a finance and accounting assignment. The interest rate parity enables the investors to access currency at an affordable rate of interest, convert the available cash by the use of the spot rates in hand and also be able to enter into the forward contract in an attempt to realize cash plus the high expected interest. In addition, the investments will be done at a higher rate of interest, conversion of cashback via forwarding contract and repayment of the interest plus the principal amount in which the interest paid will obviously be lower than the interest received. When a company involves in foreign exchange transactions, various risks are imminent to hinder its overall smooth flow of operations.
Among them include economic risk, transaction risk and translation risks. Transaction risk involves the risk associated with the exchange rate where there is a delay in the time when entering into a specified financial contract and when settling it. For instance, where the time difference between the settlement period and the date of entering the contract is large then the company will face a greater transaction risk.
This is due to the availability of more time for fluctuation of the exchange rate. Economic risk involves the risks associated with the frequent changes in the economy. The companies involved in international trade are not able to predict effectively the changes that the economy can experience in the long run. For instance, the economic recession in which the world faced in early 2008 affected the financial exchange market and the exchange rate declined tremendously. Such an effect made the investors shy away from investing in the stock markets especially the ones outside their domestic country.
Currently, financial analysts predict future economic implications that will be experienced in the financial sector. For instance, the ‘ exit strategies’ deployed by governments and central banks of industrialized countries may impede economic development in the near future. In this case, the Central Banks will foster the reduction in the currency supply in order to impede the drying up of markets. Such practices will have an effect on the exchange rate and cross-border investors will be adversely affected.
Berk, J. D. 2007. Corporate finance. London: Pearson Addison Wesley.pp 45-69
Ross, S. W. 2006. Corporate Finance. New York: McGraw-Hill/Irwin.pp 102-152