Corporations

Definition

Corporations are legal entities that are separate from their owners, designed to conduct business and generate profit. They can raise capital through the issuance of stocks and bonds, which makes them critical players in financial markets, including the foreign exchange market where they participate in currency transactions for international trade, investment, and hedging against currency risk.

5 Must Know Facts For Your Next Test

1. Corporations can be publicly traded or privately held, with public corporations being required to disclose financial information to shareholders and regulatory authorities.
2. They play a significant role in the foreign exchange market by exchanging currencies for international transactions, investments, and managing exposure to foreign exchange risk.
3. Multinational corporations operate in multiple countries, impacting global trade dynamics and influencing currency demand across different markets.
4. Corporations use foreign exchange derivatives, such as options and futures, to hedge against potential losses from currency fluctuations.
5. The formation of a corporation typically requires adherence to specific regulatory requirements, including filing articles of incorporation and obtaining necessary licenses.

Review Questions

• How do corporations utilize the foreign exchange market to manage their international operations?
  • Corporations utilize the foreign exchange market primarily to facilitate international transactions, invest in foreign assets, and hedge against currency risk. By engaging in currency exchanges, they ensure that they can pay for goods and services in different currencies without facing significant losses due to exchange rate fluctuations. Additionally, corporations may use derivatives to further protect themselves from potential adverse movements in currency values.
• Discuss the impact of multinational corporations on global foreign exchange markets.
  • Multinational corporations significantly impact global foreign exchange markets by creating substantial demand for various currencies through their international operations. As these companies engage in cross-border trade and investments, they require currencies of the countries they operate in, leading to increased liquidity and volatility in those currencies. Their actions can influence exchange rates and affect overall market dynamics, making them key players in the foreign exchange landscape.
• Evaluate the implications of limited liability for corporations participating in foreign exchange transactions.
  • The concept of limited liability is crucial for corporations as it allows them to engage in potentially risky foreign exchange transactions without putting their owners' personal assets at risk. This encourages corporate entities to participate more actively in global financial markets and explore opportunities for expansion. However, while limited liability provides protection, it also raises concerns about accountability for corporate actions, especially during economic downturns or financial crises that may arise from such trading activities.

Related terms

Limited Liability: A legal structure that protects a corporation's owners from being personally liable for the corporation's debts and obligations.

Stock Market: A marketplace where shares of publicly traded companies are bought and sold, providing corporations with access to capital by selling ownership stakes.

Foreign Direct Investment (FDI):

Investment made by a corporation in one country into business interests in another country, often through establishing operations or acquiring assets.