The United States operates in a global economy and is considered number one in the world in terms of international trade and investment. International business decisions are often made with a focus on the market that businesses operate in, however, the trap they find themselves in is one of making decisions ignorant of the events could impact the international risk. Risk identification is the first step in limiting financial losses. The risk factor information complied below comes from articles and the simulation.
Listed below are just a few of the numerous risks involved with international business:
??? Exchange Rate Risk – Affected by government exchange controls, availability, and the exchange rate could be different tomorrow,
??? Political/Sovereign Risk – The stability or instability of foreign governments which can negatively affect profits, and maintenance of favorable relations with the United States,
??? Transaction Risk – Associated with the potential gains and losses on a given transaction susceptible to foreign exchange rate movements,
??? Translation Risk – Accounting-based risk stemming from the translation of financial statements from one currency to another.
Of the items listed above the two biggest international investment concerns are Exchange Rate Risk and Political Risk.
Exchange Rate Risk
Exchange Rate Risk involves coordinating cash settlements from two different banks and two different currencies at the same time. The exchange rate can change day to day and in some cases minute by minute. In foreign exchange trading, this action requires a high degree of communication and cooperation between those banks. The remote possibility exists that the foreign bank could go bankrupt or close.
In the year 1999 there was concern that as the banking institutions internal clocks changed over to year 2000 that the banks, US and foreign, would stop communicating. This did occur and international business went on as usual.
The danger of political risk is the risk that revolution or other political conditions could result in a loss. This could include in any of the following: political violence, civil unrest, insurrection, social unrest, terrorism, or war; governmental expropriation/confiscation of assets; or inconvertibility of foreign currency.
As with any venture, knowing the risks beforehand is an important factor in operating a successful international business. Know the rate of exchange before transferring money. Study the county the business wants to sell its product in paying close attention to whom is in power, how involved is the government and is there any political unrest. Knowing these factors will help lower the companies risk and losses.