Research Proposal - Impact of Exchange Rate Volatility on Multinational Corporation's Profitability IBF301

Name: - Khushi Upganlawar

Student ID: - 15172815

Research Proposal - Impact of Exchange Rate Volatility on Multinational Corporation's Profitability

1. 
   

   Introduction

   
   

Multinational corporations' (MNCs') cross-border operations have significantly increased as a result of business's growing globalisation. MNCs face a complicated web of hazards as a result of their international expansion, even while it gives them access to new markets and resources. Of these, exchange rate volatility is one that has a significant impact on profitability. An MNC's revenues (when converting overseas earnings back to the native currency), costs (of imported materials or production elements), and eventually its bottom line can all be greatly impacted by fluctuations in exchange rates. With an emphasis on identifying the main channels of influence, examining the moderating impacts of firm-specific features, and assessing the efficacy of hedging techniques, this study aims to examine the impact of exchange rate volatility on the profitability of multinational corporations. In an increasingly unstable global world, MNC managers must have a greater grasp of these dynamics in order to make wise decisions about risk mitigation, financial management, and strategic planning. Effective management of exchange rate risk is essential for long-term profitability and competitiveness in today's globalised business environment, when companies operate across several currencies.

1.1 Problem Statement

The results of previous studies on the connection between MNC profitability and exchange rate volatility have been inconsistent and frequently inconclusive. According to some research, there is a negative correlation between exchange rate changes and profitability. Some studies, however, reveal no discernible effect or even a positive correlation in some cases, possibly as a result of some firms' capacity to adjust to or profit from volatility. Variations in techniques (e.g., different measures of volatility, profitability, or sample periods), data samples (e.g., focussing on specific industries or countries), and the particular elements taken into consideration in the research could be the cause of this discrepancy in the literature. Furthermore, the precise mechanisms via which exchange rate volatility impacts MNC profitability are not fully understood in the research. Which is it more likely to affect: future cash flows and competitive positioning (economic exposure) or present transactions (transaction exposure)? By examining the direct and indirect consequences of exchange rate variations while taking transaction and economic exposure into account, this study seeks to close this gap. This study will specifically look into whether the effects of exchange rate volatility differ depending on the industry and size of the company, as well as whether certain hedging techniques can successfully lessen the negative effects. For instance, larger companies might have access to more advanced hedging techniques than smaller companies.

1.2 Research Questions and Objectives

The following important questions are the focus of this study:
-What impact does exchange rate volatility have on MNC profitability?

-Are there times when the relationship can be neutral or even positive, or is it always negative?
-Which are the main ways that MNC profitability is affected by currency rate volatility (e.g., transaction exposure, economic exposure)? For various MNC types, what kind of exposure is most important?
-Do firm-specific factors like size, industry, and financial leverage affect how exchange rate volatility affects MNC profitability? Are some sectors of the economy or sizes of businesses more susceptible to changes in exchange rates?
-Which hedging techniques may multinational corporations use to lessen the detrimental effects of currency rate volatility on their bottom line?

-Are there any particular hedging strategies that are more efficient than others.

*The research has the following particular goals in order to answer these questions:

-to investigate empirically the connection between exchange rate volatility and other MNC profitability metrics, such as profit margins, return on equity (ROE), and return on assets (ROA). Financial data will be statistically analysed for this.
- to determine and measure the main ways that MNC profitability is impacted by exchange rate volatility. A more thorough examination of the company's cash flows and operations will be necessary for this.
- to examine how firm-specific factors (size, industry, and financial leverage) affect the link between profitability and exchange rate volatility. Comparing the effects of volatility on various company types will be necessary for this.

- to assess how well various hedging techniques (such as financial hedging with derivatives and natural hedging) reduce exchange rate risk. This will entail evaluating how hedging affects risk and corporate profitability.

1.3 Significance of the Study

By offering a more sophisticated comprehension of the intricate connection between exchange rate volatility and MNC profitability, this study will add to the body of previous work. This study will go beyond straightforward correlations and offer more useful insights by looking at the precise routes of influence and the moderating effects of firm-specific factors. MNC managers will benefit practically from the findings, which will give them knowledge about:

- the precise mechanisms by which fluctuations in currency rates impact the profitability of their company.
- the significance of taking firm-specific factors into account when evaluating exchange rate risk.
- the efficiency of different hedging techniques in reducing currency rate risk.

Policymakers, regulators, and investors will also find the research interesting since it will help them better appreciate the opportunities and problems encountered by multinational corporations (MNCs) in a globalised world. The study may help policymakers make decisions on regulations or policies pertaining to exchange rates. The study can assist investors in evaluating the risk and return characteristics of multinational corporations.

2. 
   

   Literature Review

   
   

2.1 Theoretical Framework

Several important theoretical frameworks will serve as the foundation for this study, including:
Exchange rates should be adjusted to equalise the costs of products and services across nations, according to the purchasing power parity (PPP) hypothesis. PPP deviations may present MNCs with dangers as well as possibilities. Author, Year, Title, Journal, Volume (Issue), Pages are examples of references.
The International Fisher Effect (IFE) is a theory that suggests a connection between predicted exchange rate changes and interest rate differentials. Author, Year, Title, Journal, Volume (Issue), Pages are examples of references.
The study will take into account the following exposure theories: economic exposure (effect on future cash flows), translation exposure (effect on consolidated financial statements), and transaction exposure (effect on current transactions). (For instance, the author, year, title, book, and publisher.)

2.2 Empirical Studies

The study will examine previous empirical research on how exchange rate volatility affects MNC profitability. Finding important findings, methodological strategies, and any gaps or discrepancies in the literature will be the main goals of this review. Studies that have looked at the efficiency of hedging techniques and the moderating effects of firm-specific variables will receive special attention. (For instance, Citation: Title, Author, Year, Working Paper, University/Institution.)

2.3 Conceptual Framework

The study will create a conceptual framework that graphically depicts the proposed connections between MNC profitability, exchange rate volatility, and other pertinent factors. The empirical analysis will be guided by this framework, which will also aid in the interpretation of the results. The main independent variable in the framework will be exchange rate volatility, the dependent variable will be profitability metrics, and the moderating variables will be firm-specific traits (size, industry, and financial leverage) and hedging tactics.

3. 
   

   Methodology

   
   

3.1 Research Design

This study will use econometric analysis and a quantitative research strategy. The association between exchange rate volatility and MNC profitability over time and among various enterprises will be investigated using panel data.

3.2 Data Collection

Several sources will be used to gather the data for this project, including:
Financial databases: To gather financial information about MNCs, including profitability metrics, company size, financial leverage, and industry classification, Bloomberg, Refinitiv, and Compustat will be utilised.
Exchange rate information: Reputable financial data sources, like the World Bank or the International Monetary Fund (IMF), will provide information on exchange rates.
Selection of the Sample: Publicly traded multinational corporations (MNCs) in a range of industries will make up the sample. The sample firms will be chosen based on certain criteria, including the scope of their global operations and the availability of data.

3.3 Data Analysis

Panel data regression techniques will be used to analyse the data. The econometric models listed below will be used:

Baseline Regression: To investigate the general connection between exchange rate volatility and MNC profitability, a baseline regression model will be employed.

Moderating Effects: To investigate the moderating effects of firm-specific attributes (industry, size, and financial leverage) on the connection between exchange rate volatility and profitability, interaction terms will be incorporated into the regression model.

Hedging methods: By incorporating variables that reflect the use of hedging instruments into the regression model, the effects of various hedging methods will be evaluated.

Robustness tests: A number of robustness tests, such as alternative metrics for exchange rate volatility and profitability, various estimate methods, and control procedures, will be carried out to guarantee the validity and reliability of the results.

4. 
   

   Expected Outcomes and Contributions

   
   

It is anticipated that this study would offer a thorough grasp of how exchange rate fluctuation affects MNC profitability. The results will provide insight into the main influencing factors, the moderating effect of firm-specific traits, and the efficacy of hedging techniques. The study is expected to show that different industries and firm sizes are affected differently by exchange rate volatility. Additionally, the study aims to pinpoint particular hedging techniques that can successfully lessen the detrimental effects of currency rate swings on profitability.