Question

What are the elements of uncertainty in an international business and some ways an organization can protect itself (hedge) or take advantage of differences in corporate taxes and variable costs to minimize the impact of negative consequences of forecast or actual operations and protect the company's profits?

Any information will help. This is a masters level advanced finance class.

Thank you.

Answer 1

There are many uncertain elements that may affect the international business operations of a company and under such circumstances very few options are available for protecting profits of a company

The risk arising due to currency fluctuations can be mitigated to a certain extent by undertaking hedging, as you have rightly suggested.The default risk arising to due to foreign debtors can be mitigated by routing all business transactions through FLC / BG, whichever the case may be, from reputed Banks only. The risk arising during transportation can be mitigated by placing proper insurance on records for goods supplied. The risk arising due to change in regulations and / or policy is difficult to manage, however keeping financial and legal experts in foreign branches for tracking market changes and also for liaising with Government machineries for smooth conduct of business may provide early warning signals regarding change in atmosphere.

The uncertain change in elements affecting corporate taxes or variable cost (labour pay, raw material prices etc) in foreign country would only bring change in profits for the company. These factors are taken into account during initial stages of setting up a foreign subsidiary/branch for arriving at profitability.