New Mexico State University International Risk and Return Fisher Effect Analysis

You are asked to help put together a training program describing the effects of exchange rates to training participants at Axetem. Your training material is to address the following:

Explain the Fisher effect and its mechanics by walking the trainees through a step-by-step explanation in the following hypothetical situation:

  • If the real interest rate is 5%, the U.S. inflation rate is at 3%, and the inflation rate of the euro area (the countries that use the euro) is at 4%, what are the nominal interest rates for both the United States and the euro area? Interpret the calculation for your trainees.
  • What are at least 3 implications of exchange rate fluctuations for Axetem as they relate to marketing and production decisions?

 1–2 pages (400 word min.)

Assignment Objectives

Analyze the risk and return of management decisions for the multinational firm.

Explain how variations in exchange rates and the cost of money influence financial management decisions.