Question

In: Finance

Please provide a discussion of the numerous implications of doing business abroad and how these issues...

Please provide a discussion of the numerous implications of doing business abroad and how these issues impact and organization. Then provide a detailed discussion of how doing business in countries with different currencies can be particularly challenging and how failure to consider currency risk can have significant negative impact on an MNC.

Solutions

Expert Solution

Implications of doing business abroad

  1. Tax differences between countries : When the business is planning abroad. The entrepreneurs must be aware about the tax systems
  2. Cultural differences : Cultural differences between countries affect the business as people are involving in the business operations.
  3. Currency risk : Financial transactions affect the currency risk since the exchange rate between countries are different.
  4. Consolidating financial statements : Financial statements of different branches are to be consolidated. The changes in the exchange rate affects the consolidation and there arises translation exposure.
  5. Legal issues : :Legal procedures also will be different for different countries. This is another implication for doing business abroad
  6. Political problems : Political environment affects the business in foreign countries. As entrepreneurs, they have to tackle it.

Negative impact of currency risk on an MNC

Currency risk affects the financial transactions of the MNC and it leads to various currency exposure. Advance locking in of exchange rate, charging customers in local currency etc can be considered to mitigate the currency risk. Derivatives like forward contracts, future contracts and Options are available to hedge against the currency risk. MNCs must be careful about the currency risk. Failure to consider currency risk can have the following impacts:

  • Economic exposure arises due to the changes in the cash flows of the company as per exchange rates.
  • Transaction exposure is the risk for receipts and payments of the company due to exchange rate changes.
  • Translation exposure is the risk arises out of consolidating the financial statements between the branches of an MNC.

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