International Risks and the tools to combat them
Corporate Finance FIN/320
Organizations that decide to engage in international financing activates also have to keep in mind that there are not only business opportunities but also a chance that there may be certain risks involved when doing business internationally. In this paper I will give an example of 3 risk and also the tools in which can be used to mitigate these risks.
What is risk? Risk is an uncertain event or condition that occurs, has a positive or negative effect on a project’s objectives.
The international financial transactions have become more complicated and rapid and as a result of this, the international financial markets are facing greater uncertainties. Currently, the financial services industry has become much more aggressive and the international market participants are getting the exposure to increased financial risks than earlier.
Below are three examples of international financial risk and the mitigation tools that can be used to alleviate these risks.
The risks faced by a company that does business or holds investments abroad. Economic exposure can include changes in foreign exchange rates or the chance of foreign countries defaulting on their debt. Companies often hedge against this type of risk through the foreign exchange market.
Transaction exposure arises whenever a company is dedicated to a foreign currency denominated transaction. Since the transaction will result in a future foreign currency cash inflow or outflow, any change in the exchange rate between the time the transaction is entered into and the time it is settled in cash will lead to a change in the dollar (Home Currency) amount of the cash inflow or outflow. Transaction exposure is a subset of economic exposure. It is because the currency fluctuations...