MNCs are best-placed to respond to unexpected changes in exchange rates if they:

Question

BlackTom AI · Accepted Answer

Diversifying sales, the location of production facilities, and raw-material sources reduces an MNC’s exposure to fluctuations in any single currency or market and creates operational flexibility to respond when exchange rates move unexpectedly.

Relevant knowledge points and concepts:
- Types of foreign-exchange exposure: transaction (contractual cash flows), translation (accounting consolidation), and economic (long-term effect on competitiveness and cash flows).
- Operational hedging (real-side actions like shifting production, sourcing, or markets) reduces economic exposure and also helps transaction exposure by creating natural offsets.
- Financial hedging (raising funds in multiple markets or using derivatives) mainly addresses transaction/financing exposure and liquidity, but does not remove competitive effects.

Step-by-step reasoning:
1. Identify the core risk: unexpected exchange-rate changes alter relative costs and revenues across countries, affecting competitiveness and long-run cash flows (economic exposure).
2. Evaluate option C: By diversifying sales across multiple currencies and markets, price and revenue risk are spread; by locating facilities in different countries, production can be shifted to lower-cost currency zones if needed; by diversifying raw-material sources, input-cost exposure to any one currency is reduced. Together these actions create natural offsets and strategic flexibility.
3. Compare other options:
   - Option A (diversify operations and the company’s funding base): partly correct — diversifying operations helps, but focusing on funding diversification addresses financing risk rather than the core operational/economic exposure. It’s less comprehensive than option C because it omits explicit sales and sourcing diversification.
   - Option B (concentrate on domestic sales only): increases currency concentration and raises exposure; this is the worst choice.
   - Option D (raise funding in more than one capital market and in more than one currency): helps financing and transaction exposure but does not protect competitiveness or long-term cash flows.

Why the correct answer is correct:
Operational diversification directly mitigates economic exposure and provides the firm with the ability to reallocate production, sourcing, and market focus when exchange rates move unexpectedly—this is the most effective strategic response.

Conclusion: The best choice is “diversify sales, location of product facilities and raw material sources,” which matches the provided answer.

MNCs are best-placed to respond to unexpected changes in exchange rates if they: Single choice

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MNCs are best-placed to respond to unexpected changes in exchange rates if they: Single choice

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