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What is the effect of an interest rate cut upon multinational corporations?

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Introduction

The effect of the sub-prime mortgage market collapse and the subsequent interest rate cuts by the Federal Reserve, upon multinational corporations Interest rates were cut in America by the Federal Reserve on the 22nd January 2008 by 0.75%, the biggest single change in interest rates since 1994. The reason for this interest rate cut was due to disastrous economic conditions, caused by the sub-prime mortgage market collapsing. The market collapsed, causing huge losses for many banks and investment banks, in particular banks such as Northern Rock. Northern Rock then had to be bailed out by the treasury, as to prevent most banks from collapsing, as banks lend to each other, so if one bank collapsed (Northern Rock in this instance) many more would follow in a domino effect. Similar fears around the banking industry were held in the USA. The inherent problem was that banks were issuing mortgages to people with bad credit ratings, 5 to 6 times the salary of the person they are lending to. ...read more.

Middle

However, the interest rate cut in itself has slowed the falling prices of shares, by allowing people to have more ability to pay back loans to banks who then in turn can invest the money in other things; these other things may include expanding their share portfolio by buying into multinational companies, this would be a good thing. One problem would be for multinational companies, who are based away from the USA, but export heavily to it. The reason why this would be problematic is because the dollar has fallen in comparison to most currencies, including the Euro and the Pound. It being weakened, means that for the dollar a US firm budgets for, they have to pay more when paying in pounds as the worth of a dollar in comparison to a pound has changed. For example, Vivomed exports sports medicine to the USA, because of the decrease in value of the dollar; they would have to either reduce prices of their product in order to maintain the same price in dollars, meaning that there is a lower mark-up with less profit made, or they ...read more.

Conclusion

most multinational companies, despite the fact that they are usually mainly unaffected by currency exchange rate change, the dollar's drastic weakening will sabotage a large amount of some of their sales market. They may still be able to sell the products, but the profit margin upon it will be less than it would've been before, resulting in lower profits for multinational corporations on the whole. Glossary Interest Rates - give the annual cost of a loan, for example, 6% of the loan has to be paid a year as a charge for borrowing the money. Federal Reserve - central banking system of the United States. Bank - a business establishment in which money is kept for saving or commercial purposes or is invested, supplied for loans, or exchanged. Treasury - The name for the center of financial operations within a state. The Treasury is responsible for such things as issuing new securities. Market - a means in which buyers and sellers can trade. Share Indexes - an index showing movement of share prices Stock Prices - price of stocks, which is the valuation of a company. ...read more.

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