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General Business Articles

Managing Political Risk in International Business

Political environment could involve a risk to businesses, domestic and foreign. Such risk is called political risk. Political risk is that perception by the businesses that their interests will get deteriorated when certain political upheaval happens. Political risk can occur in both democracies as well as in the totalitarian set ups as well.

Political Risks are of different types. There are micro and macro political risks. Micro political risk is the one that affects a particular firm or class of firms. Usually firms owned by one class of businessmen, say, the foreigners from certain country, a particular business family or region/state.… Read the rest

Abey Francis

Forex Operational Risk Management through Production Management

There are four production related strategies available to deal with foreign exchange operational risk. These are input-mix, plant location, relocation of production and cost cutting.

  1. Input-mix: Global sourcing is a great strategy to deal with operating risk. In a survey of 152 manufacturing companies world over, the Machinery and Allied Products Institute, a research firm, found that 77% of them had increased their global sourcing since the rise of the dollar, which rises dollar cost. This is as it should be. The principal effect of a real exchange rate change is to change the price of domestically produced goods relative to foreign goods.
… Read the rest
Abey Francis

Forex Operational Risk Management through Marketing Management

Operating risk in foreign exchange operations can be negotiated ably through marketing management strategies as well. These are: market selection, product strategy, pricing strategy and promotion strategy.

Market Selection:

Impact of exchange rate fluctuations on operating profit can be dealt through right mix of markets. Major strategic operations for an exporter are the markets in which to sell and the relative marketing support to devote to each market. Marketing management must take into account its economic risk and selectivity, adjust the marketing support, on a nation-by-nation basis, to maximize long-term profit. From the perspective of non-US companies, the strong U.S. dollar is a golden opportunity to gain market share at the expense of their U.S… Read the rest

Abey Francis

Managing Foreign Exchange Risk with Forex Market Hedge

A firm may be able to reduce or eliminate currency exposure by means of Forex market hedging. Important Forex market hedging tools used for managing Forex risk are :

1. Hedging Through Options Market:

Buying a Call option in Forex can be used by an importer or borrower to hedge his payables against exchange rate fluctuations. This is done only if is felt that the foreign currency is in an appreciation mode. Buying a Put option can be used by an exporter or lender to hedge receivables. This is done only when the foreign currency is in a depreciating mode.… Read the rest

Abey Francis

Managing Foreign Exchange Risk with Money Market Hedge

Firms, which have access to international money markets for short-term borrowing as well as investment, can use the money market for hedging Forex transactions exposure.

Important money market hedging tools used for managing Forex risk are :

1. Discounting Foreign Currency Denominated Bills Receivable:

Discounting is used in cases where the export receivables are settled through bills of exchange. The system enables the recipient to receive cash prior to the settlement date itself. The discount represents the cost for the facility extended by the bank discounting the bill. It enables the exporter to guard himself from -losses arising out of an adverse change in-the foreign exchange rate.… Read the rest

Abey Francis

Internal Strategies for Managing Forex Transaction Risk

Transaction risk arises from executed contracts resulting in Forex payables or receivables in the future. The domestic currency value of these payables or receivables at current exchange rate and at future exchange rate is expected to be at variance, resulting in transaction risk. The forex transaction risk can be hedged using internal strategies. Internal strategies refer to strategies that are internal to the firm and its affiliates. These are “home’ arrangements. The counter party to the transactions may be involved. But third parties are never involved.

The different internal strategies used for managing forex transaction risk are:

  1. Risk Netting: This strategy involves matching forex receivables in a currency with forex payables in that currency.
… Read the rest
Abey Francis
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