When a MNC decides to go abroad, two main methods of currency conversion are available: the use of 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? PPP is more important. This is because PPP exchange rates are relatively stable in the short run. By contrast, 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 Market exchange rates are not the logical choice when financial flows are involved. Exchanges rates are so volatile. Most of the MNC's they use exchange rate forecasting techniques before diciding go abroad. However, problems arise because exchange rate series are not stationary MER is more important. This is because PPP is harder to measure than market-based rates. Also, there are differences in wage between countries. In addition, PPP theory does not jold on the long run 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. Hence, most of the MNC's they use exchange rate forecasting techniques before diciding go abroad PPP is more important. This is because PPP exchange rates are relatively stable over time. By contrast, 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