Question

The international financial manager needs to understand the different set of risks that foreign direct investors face when compared to exporters or importers and then to appreciate how to deal with them. What are these risks and how should they be managed?

Answer 1

When an organization decides to engage in international financing activities, it takes on additional risk along with the opportunities. The main risks that are associated with businesses engaging in international finance include foreign exchange risk and political risk.

• The major international risks for businesses include foreign exchange and political risks.
• Foreign exchange risk is the risk of currency value fluctuations, usually related to an appreciation of the domestic currency relative to a foreign currency.
• Political risk happens when countries change policies that might negatively affect a business, such as trade barriers.
• Employing hedging strategies and purchasing political risk insurance are two ways companies can reduce the impact of international business risks.

These challenges may sometimes make it difficult for companies to maintain constant and reliable revenue. In this article, we'll review the strategies companies can employ to reduce the impact of the risks they face from doing business internationally.

Foreign exchange risk occurs when the value of an investment fluctuates due to changes in a currency's exchange rate. Foreign exchange risk is also known as FX risk, currency risk, and exchange-rate risk. When a domestic currency appreciates against a foreign currency, profit or returns earned in the foreign country will decrease after being exchanged back to the domestic currency. Due to the somewhat volatile nature of the exchange rate, it can be quite difficult to protect against this kind of risk, which can harm sales and revenues.

Manage Exchange Rate Risk

1. You should do a sensitivity analysis for all of your major markets when you are doing your business forecasts. ...
2. You can purchase currency on the futures market to align with your expected collection date.
3. You can also purchase an option to buy at a certain price if the exchange rate exceeds a certain level.