A multinational company becomes unprotected to potential benefits and losses in their daily conducts because of changes in values of assets and liabilities that have dominance in foreign markets. Due to increased imports, exports and foreign investments, firms have to face various foreign exchange risks (McGovern, 2016). In multinational companies, managers used to ignore exposure to foreign exchange. However, due to the end of 1973 Agreement, a major fluctuation was seen in exchange rates of major currencies. Due to the change in these currency fluctuations, assets and liabilities’ values in multinational companies are affected. The change in values of assets and liabilities results in foreign exchange risks. The idea of foreign exchange fluctuations is introduced by Héricourt and Poncet (2015) as a process of appreciation or depreciation of currency against any other currency. Appreciation is an increase in the value of currency against some other currencies and depreciation is reduction in value of currency. Foreign exchange rate fluctuations include this appreciation and depreciation of currency. This change in foreign exchange rates results in undesirable impact on operations of company. Financial managers have to manage foreign exchange risks in order to get long term success (Johnson, 2013). In order to draw findings in present study, following research questions are formulated;

• What is meant by the term foreign exchange fluctuations in accordance with literature?
• Is there any effect of exchange rate fluctuations on financial performance of companies?

1.Relevant Economic Theory

Classical international trade theory

In accordance with this theory international trade involves geographic supposition. In various countries, different kinds of resources are present. Smith (1776) stated that if two of the countries desire to trade voluntarily, then in this case both of the countries should acquire absolute benefit theory. In case when one nation earns nothing or when it loses it, then it can refuse it. In accordance with Smith, beneficial trade in between two countries takes place depending on the absolute benefit. According to the perceptions of Smith, in between different countries the major factor of production cost is labor. Ideas of smith related to absolute advantage were basically for the progress of though for global trade. Hobson (2012) is known as the developer of theory of global trade on competitive benefit, where it has been proven the potential acquirements from trade are more than envision of Smith in the idea of competitive benefit. The cost advantage is the main factor for global trade and specialization. The perception made is that global trade theory is dependent over the labor value. Through this, cost of item can be described in units of labor. The theory perceives the exchange system. It is termed as free trade with no restrictions from any country and there is no involvement of transport costs while production factors, full employment and perfect competition are mobile in one country and are immobile in between different countries. There are three parts for the description of classical theory of global trade, comparative cost advantage, equal cost advantage, and absolute cost advantage. However, trading can also be done when there is no existence of absolute cost advantage. In case of different exchange rates, trade can take place (Gandolfo, 2013).

2.Key Literature

2.1.Exchange rate fluctuations

Financial exchange market has become one of the largest financial markets all around the world. Gounopoulos et al (2013) defined financial exchange market as financial market where currency of one country is exchanged with currency of other country. In financial market, trading of all currencies is not done but only common currencies are traded. Major participants of financial exchange market are commercial and investment banks. In one country, price of its currency is determined by forces of market that exist in a day and this decides the exchange rate fluctuation.

2.2.Financial Performance

Due to increased globalization and competitiveness, every kind of companies are trying to bring more international business transactions. Companies in developing countries are putting efforts for increasing their share in commerce of world. However, there is an extreme fragility in economies of developing countries, while periodic recessions are faced by economies of countries (Gyntelberg et al, 2014). There is an increased volatility in exchange rates of currency and this creates high level of risks to companies that conduct business in foreign countries and in addition to this, to investors who invested in international companies. This affects earnings, cash flow, profitability and balance sheet of foreign compan