Should MNCs Use Forward Rates to Estimate Dollar Cash Flows of Foreign Projects?

Point Yes. An MNC’s parent should use the forward rate for each year in which it will receive net cash flows in a foreign currency. The forward rate is market determined and serves as a useful forecast for future years.

Counter-Point No. An MNC should use its own forecasts for each year in which it will receive net cash flows in a foreign currency. If the forward rates for future time periods are higher than the MNC’s expected spot rates, the MNC may accept a project that it should not accept.

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