Foreign investments & foreign currency transactions

Concept

During past some decades, a new and fundamentally different form of international commercial activity has developed and has greatly increased worldwide economic and political inter-dependence. Today multinational corporate networks control large and growing shares of the world’s technological and productive resources.

Corporation with significant foreign operations are called international and multinational corporations. Such corporation must consider many financial factors that do not directly affect purely domestic firm. These include foreign exchange rates, offering interest rates from country to country, complex accounting procedure and methods for foreign operations, foreign tax rates, and foreign governmental intervention. The entire noted factor should be considered while making foreign investment i.e. the investment and the flow of fund made by a firm of one country into another country.

Foreign currency transaction forms the inseparable part of foreign investments. It is so; because in order to ascertain financial result of the overall business, the book of overseas / abroad branches / or subsidiaries maintained in the local currencies are to be translated into “parent” currency. More specially, when we account for foreign transactions we should calculate the amount in our domestic currency, using the exchange rate that applied on the day of the transaction. Any foreign currency held, as well as any amounts  of currency the we owe or are owed, should be converted into domestic currency using the rate in force on the date of the balance sheet. If we make any gains or losses as a result of foreign currency transactions, we should include these in our profit and loss account. Bear in mind that holding assets in a foreign currency will have an impact on balance sheet since – owing to exchange rate movements – their value might differ radically from one year to the next. If requires an exchange market and rate or price of one currency quoted in terms of another currency to facilitate translation or conversation.

We have already discussed about the investment decision made by a domestic firm involved in the domestic project. They were simple and not shadowed by complexities relating to foreign countries and foreign currencies. Here, in this chapter, we will discus about the foreign investment decision along with the brief explanation about foreign exchange rate inflation rates and other relevant factors that emerge in the course of foreign investment.