f technology is thereasons for recent International Business growth. The rapid growth in
international business makes an understanding of organizational behavior
all the more important for contemporary managers. Businesses have expanded
internationally to increase their market share, as the domestic markets
were too small to sustain growth. Business transactions are also becoming
increasing blurred across national boundaries.
Companies engage in international business to expand sales, acquire
resources, diversify their sources of sales and supplies, and minimize
competitive risk. When operating abroad, companies may have to adjust their
usual methods of carrying on business. This is because foreign conditions
often dictate a more appropriate method and because the operating modes
used for international business differ somewhat from those used on a
domestic level. In many ways, then, we are becoming a truly global economy.
No longer will a firm be able to insulate it from foreign competitors or
opportunities. International business usually takes place in more diverse
external environments than found domestically. Businesses worldwide are no
longer going International but expanding globally. This fast occurring
global expansion of businesses all over the world has been given a new
term, it is called international business.
As human beings, we encounter risk every day of our lives. As a manager,
risk becomes even more important, especially when entering the world of
international business. In the business world, risk is the chance that an
investment’s actual return will be different from expected. When dealing
with international finance, risk is calculated in many different areas.
Here, I will discuss the financial risks associated with international
business, with an emphasis on the risk of foreign exchange rates. Country
Risk When a business decides to become an international trader, one type of
risk that must be examined is the country risk. When a company accepts or
approves credit to a foreign customer, they are not only assuming the
foreign company’s risk, but also the country’s risk. Country risk analysis
means determining the country credit-worthiness. In terms of the ability
and willingness of a foreign government to make available to local
companies foreign exchange necessary to service their foreign currency
denominated obligations or debts to foreign suppliers.
Mitigation of Country Risk
One way a company can help to mitigate country risk is by fully researching
the foreign country they wish to do business with. This is accomplished by
conducting a country risk assessment. This assessment takes into
consideration the probability of credit loss or delayed payment, and uses
the results to determine if the corporation will extend credit with the
foreign business. Foreign Exchange Risks Foreign exchange risks are often
the result of country risks. Foreign exchange risks can be defined as the
ability and willingness of the government to make enough foreign exchange
available to pay their foreign currency denominated liabilities or debts.
(www.bcfm.com) Foreign exchange rates can fluctuate often, which can
complicate a business’s financial decisions and strategies.
There are two types of foreign exchange rate risk. They are transaction
risk and economic risk. Transaction risk arises when a business agrees to
receive a known amount of foreign currency. This type of risk is associated
with the time delay between entering into a contract and the settlement of
the contract. The second type of foreign exchange rate risk is economic
risk. Economic risk arises because rate fluctuations can often affect the
competitive position of the company. An example of how this can occur deals
with a foreign currency falling in price relative to the US dollar. In this
instance, the foreign market can compete more strongly in the US market.
Mitigation of Foreign Exchange Risk When a business is faced with potential
exchange rate risk, there are a number of ways to help mitigate the risk.
One such way is to enter into a foreign exchange forward contract. This is
an agreement to trade at a future date a given amount of currency at an
exchange rate agreed to today. (Brealey, Myers ; Marcus, p. 617) There are
many benefits to entering this type of contract. One benefit is the
contracts can be arranged to either buy or sell a foreign currency against
the domestic currency, or against another foreign currency. This contract
is available in all major currencies, and is available for purposes such as
investment or trade. Conclusion Risk is calculated into every business
decision that is made. This is especially true when dealing with
international business. Financial risks such as foreign exchange risks are
issues that a company must take precautions against in order to be
successful. By employing the use of a foreign exchange forward contract, a
business will be able to successfully mitigate the effects of foreign
Brealey, S.C. Myers, ; A.J. Marcus. Fundamentals of Corporate Finance (4th
ed.) McGraw-Hill/Irwin, 2004 New York, NY