Two Types Of Foreign Exchange Rate Risk example essay topic

Today's world of rapid increase in and expansion of technology is the reasons for recent International Business growth. The rapid growth in international business makes an understanding of organizational behavior all the more important for contemporary managers. Businesses have expanded internationally to increase their market share, as the domestic markets were too small to sustain growth. Business transactions are also becoming increasing blurred across national boundaries. Companies engage in international business to expand sales, acquire resources, diversify their sources of sales and supplies, and minimize competitive risk. When operating abroad, companies may have to adjust their usual methods of carrying on business.

This is because foreign conditions often dictate a more appropriate method and because the operating modes used for international business differ somewhat from those used on a domestic level. In many ways, then, we are becoming a truly global economy. No longer will a firm be able to insulate it from foreign competitors or opportunities. International business usually takes place in more diverse external environments than found domestically.

Businesses worldwide are no longer going International but expanding globally. This fast occurring global expansion of businesses all over the world has been given a new term, it is called international business. As human beings, we encounter risk every day of our lives. As a manager, risk becomes even more important, especially when entering the world of international business. In the business world, risk is the chance that an investment's actual return will be different from expected. When dealing with international finance, risk is calculated in many different areas.

Here, I will discuss the financial risks associated with international business, with an emphasis on the risk of foreign exchange rates. Country Risk When a business decides to become an international trader, one type of risk that must be examined is the country risk. When a company accepts or approves credit to a foreign customer, they are not only assuming the foreign company's risk, but also the country's risk. Country risk analysis means determining the country credit-worthiness. In terms of the ability and willingness of a foreign government to make available to local companies foreign exchange necessary to service their foreign currency denominated obligations or debts to foreign suppliers. (web manager/%20 international fm 98. htm) Mitigation of Country Risk One way a company can help to mitigate country risk is by fully researching the foreign country they wish to do business with.

This is accomplished by conducting a country risk assessment. This assessment takes into consideration the probability of credit loss or delayed payment, and uses the results to determine if the corporation will extend credit with the foreign business. Foreign Exchange Risks Foreign exchange risks are often the result of country risks. Foreign exchange risks can be defined as the ability and willingness of the government to make enough foreign exchange available to pay their foreign currency denominated liabilities or debts. (web) Foreign exchange rates can fluctuate often, which can complicate a business's financial decisions and strategies. There are two types of foreign exchange rate risk. They are transaction risk and economic risk.

Transaction risk arises when a business agrees to receive a known amount of foreign currency. This type of risk is associated with the time delay between entering into a contract and the settlement of the contract. The second type of foreign exchange rate risk is economic risk. Economic risk arises because rate fluctuations can often affect the competitive position of the company. An example of how this can occur deals with a foreign currency falling in price relative to the US dollar. In this instance, the foreign market can compete more strongly in the US market.

Mitigation of Foreign Exchange Risk When a business is faced with potential exchange rate risk, there are a number of ways to help mitigate the risk. One such way is to enter into a foreign exchange forward contract. This is an agreement to trade at a future date a given amount of currency at an exchange rate agreed to today. (Brealey, Myers & Marcus, p. 617) There are many benefits to entering this type of contract. One benefit is the contracts can be arranged to either buy or sell a foreign currency against the domestic currency, or against another foreign currency. This contract is available in all major currencies, and is available for purposes such as investment or trade.

Conclusion Risk is calculated into every business decision that is made. This is especially true when dealing with international business. Financial risks such as foreign exchange risks are issues that a company must take precautions against in order to be successful. By employing the use of a foreign exchange forward contract, a business will be able to successfully mitigate the effects of foreign exchange risks. web manager/%20 international fm 98. htm R.A. Brealey, S.C. Myers, & A.J. Marcus.

Fundamentals of Corporate Finance (4th ed.) McGraw-Hill / Irwin, 2004 New York, NY.