When a MNC decides to go abroad, two main methods of currency conversion are available: the use market exchange rates, MER, (the rate prevailing in the foreign exchange market), and the purchasing power parity (PPP) exchange rate (the rate at which the currency of one country would have to be converted into that of another country to buy the same amount of goods and services in each country). Is PPP or MER more important when a multinational company decides to invest in a foreign country?

		Market exchange rates are stationary and are the logical choice when financial flows are involved. In general, exchanges rates are so volatile, and only market exchange rates provide the fair value of the exchange between two currencies. PPP holds only in the short run
		Under the PPP hypothesis the exchange rate between two countries shifts according to the level of relative prices and hence it is a stationary process. MER are more volatile, and using them could produce quite large swings in expected cash flows even when cash flows in individual countries are stable
		There is no difference between those two approaches. This is because both measures depend on economic conditions, which are volatile. Also, PPP hypothesis doesn't hold because of market imperfections
		MER is more important because represents a non-stationary process. This is because PPP is harder to measure than market-based rates. Also, there are differences in wage between countries.