Foreign Exchange Risk and Capital
Budgeting.
How is foreign exchange risk sensitivity factored into the
capital budgeting analysis of a foreign? project?
Please answer this question IN YOUR OWN WORDS.
Explain how to incorporate political risk into the capital
budgeting process of a foreign investment project? How can
political risk be mitigated (managed)
What is foreign exchange risk?
What are the causes of foreign exchange risk and what actions
would you take as a financial manager to mitigate the risk?
QUESTION 2 a. Foreign exchange risk or exchange rate risk is a
financial risk that occurs when a financial deal is denominated in
a currency other than that of the base currency of the company.
Explain the following types of risks that international firms are
exposed to: a. Transaction risk b. Translation risk c. Economic
risk b. For each of the risks explained above, state three (3) ways
of mitigating them.
Capital Budgeting Theoretical Framework.
Capital budgeting for a foreign project uses the same
theoretical framework as domestic capital budgeting. What are the
basic steps in domestic capital budgeting?
In order to recognize risk in capital budgeting, explain how
this risk recognition could be done with the cash flows of the
possible project ; explain how this can be alternatively be done
with the weighted average cost of capital.
There are different types of risk involved in foreign exchange.
One type of risk is risk involved in forward markets. There are
various factors involved in the fluctuation or the rate of forward
market. Explain the factors involved in forward market and why
should a treasury department hedge or keep the exposure open for a
currency (explain with an example).
1.A) What are the three types of risk that are relevant to
capital budgeting? How is each of these risks measured, and how do
they relate to one another? How is each type of risk used in the
capital budgeting system?
B) Are there problems with scenario analysis? Define Simulation
analysis, and discuss its principal advantages and
disadvantages.
C) What is a real option? What are some types of real
options?