HOW DOES CURRENCY RISK ARISE WITH RESPECT TO CASH BALANCES THAT AN...

66. How does currency risk arise with respect to cash balances that an MNC holds in foreign funds in a bank in a developing nation? a. Cash balances held by an MNC in a bank in a developing nation may be subject to expropriation by the government of that developing nation, so that the MNC is deprived of those funds. b. When an MNC deposits funds in a foreign bank account, it transfers those funds from a bank account in another country, and, since the funds must be converted into the currency of the country where the bank is located, the MNC risks incurring a loss on that conversion. c. Withdrawal of funds in foreign banks accounts and conversion of those funds into the home currency of the MNC may be restricted in developing nations, so that the MNC may not have immediate access to those funds and the value of those funds may decline before the MNC can recover the funds. d. Typically, the interest rate paid on funds deposited in foreign bank accounts is below the market rate, so the funds deposited in foreign bank accounts earn below-market returns.