Question

1. Why does many companies entering international business ignore the element (cost) of doing business overseas?

2. What were some of the reasons interest dropped on freight derivatives in 2002? Had this occurred to a lesser extent at any time previously?

Answer 1

Answer(1): Many companies do business internationally as they get many benefits by doing business internationally. They do the cost-benefit analysis. Inspite of heavy cost, companies do business overseas because of the following advantages:

Growth opportunities- Companies expand the business internationally as they want to grow their business out of the borders. They get growth in terms of cash inflow, brand value, market share, net profit etc. They enter into new market with new products and tap the untapped market.

Diversification- Companies do business internationally for diversifying the risk, companies become less vulnerable and it also keeps balance on company's profit and sales numbers.

Answer(2): Reason interest dropped on freight derivatives in 2002- The freight derivative act was going well but in 2002, the interest dropped as Forward freight agreements (FFA) were used instead of Baltic International freight futures exchanges(BIFFEX).

FFA is a forward freight agreement that facilitates ship owners and speculators to hedge against the volatility of freight rates. Freight rates keep on changing time to time, rate change is a risk for traders and speculators, to reduce this price risk, they use FFA. Contracts are traded Over the counter (OTC) and these contracts are customized.