Foreign direct investment and exchange rate risk

(Hassan Rphian Alahjhoj)

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Abstract

A common method of engaging in international business is foreign direct investment (FDI). Yet, its benefit must be compared with relevant risks in order to make the appropriate investment decisions. The main focus in this study is on exchange rate risk. Exchange rate risk can create a difference in the cost of capital of firms located in different currency zones, thereby influencing the flow of international investment. The premise used throughout this study is that exchange rate risk can not be fully protected against and should be an element of consideration in investment decision. This paper uses two-country model to illustrate the relationship of domestic and foreign investment to exchange rate risk. It is found that exchange rate risk affects corporate foreign investment in a significant way. It is also shown that the model embodies several results based on economic variables
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