Premium Essay

Minimizing Risks in Foreign Markets

In: Business and Management

Submitted By bowermanpa
Words 897
Pages 4
Minimizing Risk in Foreign Markets
Tiffany Bowerman
Shorter University

Minimizing Risk in Foreign Markets Many years ago when businesses predominately operated in the country in which they originated, foreign market losses were not of concern. However, in today’s market where many companies operate globally, the condition of foreign markets cannot be ignored. There are several strategies that companies can employ to safeguard itself against foreign losses.
The foreign exchange market is a market that converts currency of one country to that of another country (Hill, 2011, p. 313). The foreign exchange market has two main functions, the one of currency conversion mentioned above and the other is to provide some insurance against unpredictable changes in exchange rates (Hill, 2011, p. 313). Hedging is the process of insuring one’s business against foreign exchange risk. Two of the most common strategies used by businesses as a means of hedging is forward exchange and currency swap. By engaging in forward exchange, two companies agree to exchange currency and finish execution of its agreement at some specific point in the future. Forward exchange rates are commonly quoted for 30 days, 90 days and 180 days for major currencies (Hill, 2011, p. 317). By engaging in forward exchange the participating business knows the rate at which the transaction will occur and guards itself against unfavorable and sudden changes in the market. Businesses can use spot exchanges as another means to execute a deal. This can be argued as a way of safeguarding against significant losses in a foreign market because the transaction is happening in real time and the participants know exactly what they are dealing with. Changes in spot exchanges occur continuously but tend to be minimal. By following trends identifying currency cross rates, companies can decide when to…...

Similar Documents

Premium Essay

Foreign Market Entry

...Foreign Market Entry Modes Expansion into foreign markets can be achieved via the following mechanisms: Exporting is the process of selling of goods and services produced in one country to other countries. There are two types of exporting: direct and indirect. Direct exports Direct exports represent the most basic mode of exporting made by a (holding) company, capitalizing on economies of scale in production concentrated in the home country and affording better control over distribution. Direct export works the best if the volumes are small. Large volumes of export may trigger protectionism. Types Sales representatives Sales representatives represent foreign suppliers/manufacturers in their local markets for an established commission on sales. Provide support services to a manufacturer regarding local advertising, local sales presentations, customs clearance formalities, legal requirements. Manufacturers of highly technical services or products such as production machinery, benefit the most form sales representation. Importing distributors Importing distributors purchase product in their own right and resell it in their local markets to wholesalers, retailers, or both. Importing distributors are a good market entry strategy for products that are carried in inventory, such as toys, appliances, prepared food. Advantages • Control over selection of foreign markets and choice of foreign representative companies • Good information feedback from target......

Words: 533 - Pages: 3

Premium Essay

Foreign Exchange Market

...Foreign Exchange Market Demond McKeever National University In view of the fact that the international business environment is not set up with a worldwide medium for exchange, the foreign exchange market is a necessity for international trade. The major functions of the foreign exchange market are to transfer purchasing power, allocate open trade for international markets, monitor exchange rates from fluctuating to rigorously, and to aid in the import and export of goods between countries by providing credit for financing international trade (Suranovic, 2005) The foreign exchange market or forex market as it is often called is the market in which currencies are traded. Currency Trading is the world’s largest market consisting of almost trillion in daily volume and as investors learn more and become more interested, the market continues to rapidly grow. Not only is the forex market the largest market in the world, but it is also the most liquid, differentiating it from the other markets. In addition, there is no central marketplace for the exchange of currency, but instead the trading is conducted over-the-counter. Unlike the stock market, this decentralization of the market allows traders to choose from a number of different dealers to make trades with and allows for comparison of prices. Typically, the larger a dealer is the better access they have to pricing at the largest banks in the world, and are able to...

Words: 2316 - Pages: 10

Free Essay

Recognizing and Minimizing Tort and Regulatory Risk

...Recognizing and Minimizing Tort and Regulatory Risk A tort is an act by a business that results in injury to a person, property, or good name. In most cases the person injured is entitled to compensation (Jennings, 2006). It is in the businesses best interest to be educated on local, state, and federal laws and regulations to reduce regulation and tort liability. A business must protect its assets, earnings, and good name. A company must have a plan in place to reduce and eliminate fines, penalties, and tort liability. The business must have a preventive plan in place to address regulation compliance and tort liability (Dore, 2008). Preventative, detective, and corrective measures The preventive plan should include measures to know and understand regulations and liability torts the business could encounter. Furthermore, the business plan should include steps that will be taken in the event of a government regulation violation or a tort liability. The plan should first identify the possible torts for non-compliance to government laws and regulations. The following are some of the issues the preventive plan should include: The business must identify health risks to employees, consumer, and the general public. The business must take solid steps to ensure the product, or services rendered is not harmful to others. An employee of the business needs to be assigned and responsible to understand the laws and regulations that affect all facets of the business. This person......

Words: 1372 - Pages: 6

Premium Essay

The Risk That Are Involved in Foreign Exchange Market

...The Risk that are Involved in Foreign Exchange Market FIN-571 January 14, 2017 Kevin Suber The Risk that are Involved in Foreign Exchange Market In a foreign market trade investors can purchase stock in the international market exchange. Investors buy into the foreign exchange market, because it makes the investor make valuable profits quicker in a good economy. For most investors this would seem to be too good of a deal to pass up however, there can be some risk involved investing in a foreign market. In this paper I will be discussing the types of risk involved in the market. Here are a few type of risk an investor could potential be hit with in a foreign exchange market. The foreign exchange risk include, exchange rate risk, interest rate risk, and country and liquidity risk just to name a few of the major risk. For investors it is important to understand the risks in the foreign market trade. The big risk like exchange rate risk can be damaging to an investor portfolio because it is based on the market perception. The exchange rate risk also factors a largely unregulated Forex off-exchange trading. Another risk involved in the foreign market is the interest rate risk. The interest rate risk by fluctuating in the forward speeds and forward mismatch of in maturity gaps in the transaction of the foreign exchange. To include with the following risk would be the country and liquidity risk in the foreign market. The investor does risk the potential of a country or......

Words: 390 - Pages: 2

Free Essay

Minimizing Tort Risk

... Recognizing and Minimizing Tort and Regulatory Risk Hector Sierra University of Phoenix Law 531 Businesses deal with tort liability and management in the day to day operations. Minimizing tort liability is a key factor in operating a successful business. Alumina Inc., has developed a plan to prevent, identify and implement corrective measures for handling tort liabilities. Recognizing and Minimizing Tort and Regulatory Risk Alumina Inc. is a $4bn U.S. based international aluminum company with eight locations worldwide. Alumina Inc. falls under certain government regulatory agencies and laws such as The Environmental Protection Agency (EPA), Occupational Safety and Health Administration (OSHA), and CERCLA. Alumina Inc. was reported to be in violation of environmental discharge five years ago. Even though Alumina Inc. corrected the violation, Alumina Inc. still faces a possible bad reputation because of this incident. Alumina Inc. has had a good record ever since that incident was corrected. A local resident of the community named Kathy Bates has accused the company of repeatedly contaminating the waters of Lake Dira before. Kathy Bates has now filed a complaint against Alumina Inc. in regards to suspicion that her daughter contracted leukemia due to the consumption of contaminated water. This complaint calls for an investigation of the company’s practices with regard to the Clean Water Act of 1972. However, traffic is causing water pollution in Lake Dira as well.......

Words: 1380 - Pages: 6

Premium Essay

Recognizing and Minimizing Tort and Regulatory Risk Plan

...Running Head: Recognizing and Minimizing Tort and Regulatory Risk Plan Recognizing and Minimizing Tort and Regulatory Risk Plan LAW/531 September 29, 2010 Introduction Alumina, Inc. makes aluminum products and has revenues of over $4 Billion Dollars. The company is based in the United States (US) with operations in eight other countries around the world. The US accounts for 70% of Alumina’s market share. Alumina has business interests in automotive components and manufacture packaging materials, bauxite mining, and Alumina refining and smelting. The company falls under the jurisdiction of Region 6 of the Environmental Protection Agency (EPA) (University of Phoenix, 2010). Recognizing and Minimizing Tort and Regulatory Risk Plan Companies and organizations such as Alumina, Inc. have corporate governances that require them to operate their businesses under government rules, regulations and boundaries. The rules and regulations have been authorized and enacted by major legislation, which are enacted by Congress and enforceable by laws. Minimizing the risk of tort liability is the goal of every organization and company. Five years ago Alumina was in violation of environmental discharge norms in a routine EPA compliance evaluation inspection. The EPA ordered a cleaned up and Alumina complied right away. Now, the case of negligence starts. The government places a high level the importance on the preservation of the environment and enforces environmental......

Words: 1581 - Pages: 7

Premium Essay

Foreign Exchange Markets

...Foreign Exchange Markets and Transactions 1) Foreign Exchange Market In 1971 the US suspended the convertibility of the dollar to gold, and by 1973 the US and other nations had accepted floating exchange rates. Today the exchange market is the largest market in the world. The market is an elaborate network of trading desks, banks, cooperations and individuals who buy and sell currencies all over the world. 2) What is an Exchange Rate? An Exchange rate is the price of a currency. The rates are available from many print and electronic sources. Direct quotes = Exchange rates that are listed in the form of “US $ Equivalent” Indirect quotes = Rates listed in the form of “Currency per US” 2.1 ) Cross Exchange rates Most quotations in exchange rates tables are expressed in terms of the US dollar. But some occasions require exchange rates expressed in term of two non-US dollar currencies. These rates are called cross exchange rates. 2.2) Bid/Ask Spread When banks or brokers facilitate currency transactions they charge a fee for their service. In many cases these fees come from the difference between the bank´s bid and ask quotes -> called the bit/ask spread. 3) Exchange Rate Movements Prices and currencies can fluctuate. 3.1) Currency Appreciation and Depreciation Appreciate= a currency in value relative to other currencies. Depreciate= a currency decreases in value A purchasing power of one currency relative......

Words: 978 - Pages: 4

Premium Essay

Minimizing Risk in the Ghanaian Banking Sector

...University of Maryland, e.mail: rwermers@rhsmith.umd.edu, Tel: 301-405-0572. We thank seminar participants at Copenhagen Business School, George Washington University, Inquire-UK and Inquire-Europe Joint Spring Conference, Institute for Advanced Studies (Vienna), Stockholm Institute for Financial Research (SIFR), Tel Aviv University, University of Manitoba, University of Toronto, Washington University at St. Louis, and especially an anonymous referee, for useful comments. All errors are ours. Investing in Mutual Funds when Returns are Predictable Abstract This paper analyzes the performance of portfolio strategies that invest in noload, open-end U.S. domestic equity mutual funds, incorporating predictability in (i) manager skills, (ii) fund risk-loadings, and (iii) benchmark returns. Predictability in manager skills is found to be the dominant source of investment profitability – long-only strategies that incorporate such predictability considerably outperform prior-documented “hot-hands” and “smart-money” strategies, and generate positive and significant performance with respect to the Fama-French and momentum benchmarks. Specifically, these strategies outperform their benchmarks by 2-4% per year through their ability to time industries over the business cycle. Moreover, they choose individual funds that outperform their industry benchmarks to achieve an additional 3-6% per year. Overall, our findings indicate that industries are important in locating outperforming mutual......

Words: 25395 - Pages: 102

Premium Essay

Foreign Exchange Risk

...MANAGING F OREIGN E XCHANGE R ISK WITH DERIVATIVES by Gregory W. Brown* The University of North Carolina at Chapel Hill May, 2000 Version 3.4 Abstract This study investigates the foreign exchange risk management program of HDG Inc. (pseudonym), an industry leading manufacturer of durable equipment with sales in more than 50 countries. The analysis relies primarily on a three month field study in the treasury of HDG. Precise examination of factors affecting why and how the firm manages its foreign exchange exposure are explored through the use of internal firm documents, discussions with managers, and data on 3110 foreign-exchange derivative transactions over a three and a half year period. Results indicate that several commonly cited reasons for corporate hedging are probably not the primary motivation for why HDG undertakes a risk management program. Instead, informational asymmetries, facilitation of internal contracting, and competitive pricing concerns seem to motivate hedging. How HDG hedges depends on accounting treatment, derivative market liquidity, foreign exchange volatility, exposure volatility, technical factors, and recent hedging outcomes. * Department of Finance, Kenan-Flagler Business School, The University of North Carolina at Chapel Hill, CB 3490 – McColl Building, Chapel Hill, NC 27599-3490. Voice: (919) 962-9250, Fax: (919) 962-2068, Email: gregwbrown@unc.edu. A more recent version of this document may be available from my web page:......

Words: 22405 - Pages: 90

Premium Essay

Foreign Currency Risk

...FOREIGN CURRENCY RISK EVALUATION ACC401 With Firm XYZ’s proposed expansion into three new foreign markets there will be several problems that arise. A risk assessment will need to be completed and presented to the board. The following is a risk assessment, with relevant subsequent mitigation measures in the area of foreign currency. Types of Risk There are primarily three types of risk that the firm XYZ faces with the expansion abroad. These are the accounting exposure, transaction exposure and the operating exposure. Accounting exposure, is defined as the exposure that a company faces due to the reduction of its value; as a result of foreign exchange differences between the currency used in the main branch and the currency used in the other country (Gertler, Kiyotaki and Queralto, 2012). Accounting exposure is also referenced as translation exposure. The item most affected by this risk is the balance sheet. This is because the balance sheet is the statement which shows the net worth of a company. Transaction exposure is the risk that a company involved in international trade might incur. Upon entering into an agreement, a company may have to pay higher costs to meet those financial obligations as a result of changes in the foreign exchange. Unlike economic exposure, transaction exposure is well-defined and short-term. Transaction exposure is simply the amount of foreign currency that is receivable or payable. Operating exposure is the risk that a firm with a......

Words: 998 - Pages: 4

Premium Essay

Foreign Market Entry

...Foreign Market Entry Modes International Business and Institutions 1 Modes of Foreign Market Entry •  •  •  •  •  Exporting Licensing/Franchising Management Focus: Tata Group: Foreign Entry Strategies pp.443-444 Joint Ventures Wholly Owned Subsidiaries Mergers & Acquisitions (M&A) 2 Exporting •  Advantages –  Avoids the substantial costs of establishing operations in the host country –  Achieve experience curve and location economies •  Disadvantages –  High transportation costs, esp. for bulk products –  Tariffs –  Divided loyalties of local agents 3 Licensing •  An arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specific period, in return, the licensor receives a royalty fee from the licensee. •  Intangible property: patents, inventions, formulas, processes, designs, copyrights, and trademarks •  Advantages –  Licensing firm does not need to bear the development costs and risks –  Make use of intangible property that a firm possesses that they do not want to develop itself 4 •  Disadvantages –  Does not give a firm tight control –  Limits a firm’s ability to coordinate strategic moves across countries –  Difficult to control its technological know-how— Opportunistic Behaviour of Licensee 5 Franchising •  Similar to licensing, but franchising involves longer term commitment and insisting strict rules on licensees •  Franchiser......

Words: 456 - Pages: 2

Premium Essay

Foreign Market Entry Strategies

...Management * Major Elements Affecting International Business * International Business Environment * The international business environment can be defined as the environment in different sovereign countries, with factors exogenous to the home environment of the organization, which influences decision-making on resource use and capabilities. * It involves three environments such as domestic, foreign and international. * Domestic environment * composed of all the uncontrollable forces originating in the home country that influence the firm’s life and development. * Foreign environment * composed of all the uncontrollable forces originating outside the home country that influence the firm. * the kinds of forces are the same as those in the domestic environment but their values often differ and changes in the values of foreign forces are at time more difficult so assess. * International Environment * interactions between the domestic environmental forces and the foreign environmental forces AND * interactions between the foreign environmental forces of two countries when an affiliate in one country does business with customers in another. * The Forces: * environment: all the forces surrounding and influencing life and development of the firm; they can be external or internal * uncontrollable (external) forces: external forces over which management has no direct control, although it can exert an influence *......

Words: 883 - Pages: 4

Premium Essay

Foreign Market Entry Modes

...M0414102 Foreign market entry modes 1. Exporting: Exporting is the process of selling of goods and services produced in one country to other countries. There are two types of exporting: direct and indirect. * Direct Exports The most basic mode of exporting made by a (holding) company, capitalizing on economies of scale in production concentrated in the home country and affording better control over distribution. Direct export works the best if the volumes are small. Large volumes of export may trigger protectionism. The main characteristic of direct exports entry model is that there are no intermediaries. Advantages: * Control over selection of foreign markets and choice of foreign representative companies * Good information feedback from target market, developing better relationships with the buyers * Better protection of trademarks, patents, goodwill, and other intangible property * Potentially greater sales, and therefore greater profit, than with indirect exporting. Disadvantages: * Higher start-up costs and higher risks as opposed to indirect exporting * Requires higher investments of time, resources and personnel and also organizational changes * Greater information requirements * Longer time-to-market as opposed to indirect exporting * Indirect exports Indirect export is the process of exporting through domestically based export intermediaries. The exporter has no control over its products in the foreign......

Words: 1200 - Pages: 5

Free Essay

Foreign Exchange Markets

...Volatile Exchange In the Global Market Discuss and explain the functions of the foreign exchange market. The role of the foreign exchange market in international business and how it impacts a country's ability to do business is simple: It keeps the money flowing around the world. The foreign exchange (FOREX) market provides a place for nations to purchase, borrow, or sell their own currency to members of other nations. What the FOREX do in this regard is provide the resources for countries to make payments and transfer funds across borders, and provides purchasing power from one currency to another. These provisions make valuations of currency available to determine one of the greatest functions of the FOREX, the exchange rate. (Hill, 2011) The exchange rate is a price determined by the number of units of one nation's currency that must be surrendered in order to acquire one unit of another nation's currency. The exchange rate between two currencies is dependent upon official or private participants to buy and sell its currency to maintain an authorized pegged rate. The exchange rates in FOREX are set then by the market and not by governments. Even with these determinations, the biggest player in defining the exchange rates rely on supply and demand of American goods and currency. International business relies directly on the functionality of the FOREX. In addition to international business, citizens traveling to foreign nations have to rely on a standard in......

Words: 1393 - Pages: 6

Premium Essay

Foreign Exchange Market

...Foreign Exchange Markets Shalanda Massenburg Axia College During the 20th century, the exchange market rates were fixed, according to the amount of gold for which they could be exchanged (Federal Reserve Bank of New York, 2008). The gold exchange standard was adopted by Britain during the nineteenth century. There were a few positive aspects of the gold exchange standard. According to the Federal Reserve Bank of New York (2008), “It served as a common measure of value, it helped keep inflation in check by keeping money supply in the gold exchanged standard economies fairly stable, and long-term planning was easier as rate changes were infrequent”. According to Britannica Encyclopedia (2008), “The gold-exchange standard came into prominence after World War I because of an inadequate supply of gold for reserve purposes”. The United States adopted the gold standard back in 1900. The most recognized reserve currencies were from the United States dollar and the British sterling. Under the gold exchange standard, countries held gold or money as reserves but the United States held reserves just in gold. According to Bordo (2008), “many of the conditions that made the gold standard so successful vanished in 1914”. By 1971, the United States decided to abandon the gold exchange standard. According to Britannica Encyclopedia (2008), “A nation on the gold-exchange standard can keep the currency at parity with gold without maintaining a gold reserve as is required under the......

Words: 1192 - Pages: 5

Miniature Furniture Pretend Play Set for Barbie Sisters Dolls House DIY Decor UK | Pretty Little Liars | Trinity Seven Movie: Eternity Library to Alchemic Girl (2017)