Question

If you are the CFO of a multinational company. What steps could you take to minimize international risk? Describe how cash flows are used to minimize political risk.

Answer 1

A. International businesses are subject to certain financial and political us that most domestic businesses will never even have to consider. Foreign currency exchange rate policy climates and events international trade law and graphics and array of unexpected variable must be accounted for prior to the first day of business.

When purchasing goods and materials necessary to the operation of business there maybe uncertainty about suppliers ability to deliver on time and within the budget one way to mitigate the risk is to diversify the supply chain by spreading orders all over several suppliers considering taking this method a step father by using suppliers that are distributed across several Nations to reduce the risk of unforeseen problems.

Environmental regulations have become increasingly significant to International companies in recent years they can affect the expense of operational expansion by Prioritising the health of planet. Many countries around the world have higher environmental standards and Alice friendly to certain industry respecting local attitudes regarding the environment can help and international expansion Gomoh smoothly local regulations for example retaining to filing documents obtaining permits and registration businesses can be difficult to navigate the most effective and ultimately least costly way is to cut through red tape.

At one time Dollar was the king and traded favourably against all other countries as the Global reserve currency in recent years the dollar has lost some of its ground to other currencies if you own a United State company engaged in business Overseas the risk and expense involved in converting dollars to local currency may fall on your shoulders when it once did not. Considering the fluctuations in conversion rates. Consider banking with an institution that has branches and a business presence both in United States and in the country where your business will do business enquiry with the bank whether it is able to manage Forex trading and convergence and make sure you are confident in its knowledge of the local country.

B. For multinational companies political risk refers to the risk that the host country will make political decisions that prove to have adverse effects on the corporate profits and goals. Adverse political actions can range from very determinantal such as widespread destruction due to revolution to those of a more financial nature such as creation of laws that prevent the movement of capital.

There are who types of political risk macro and micro risk.

The simplest solution is to conduct a little research on the riskiness of a country other by paying for reports from consultants that specialise in making these assessments are doing a little bit of research yourself. But a comprehensive and systematic approach to political risk can further be enhanced by buying a policy insurance. It is the most popular way of dealing with political exposures. Political risk is generally difficult to quantify compared to car accidents or damaged property for example copper is generally preferred to manage political risk by using export credit agencies of their home countries that typically public or publicly mandated of a government bank loans.

In addition any insurance premium will still be substantial and reduce the return on investment of a project the cost of insurance must therefore always compare favourably to retaining the risk internally mean by the companies credit rating may be affected when large projects exposed to political risk remain an insured when the potential loss exposure to political risk is so high that the results and cash flow of a company will be impacted significantly export insurance is often the only viable option cash flows play important role