11. Risk Management and Currency Risk Flashcards
What is financial risk?
The risk of future financial conditions being different to those expected
What are the 4 types of financial risk?
- Currency risk (exchange rates)
- Interest rate risk
- Credit risk - risk of non payment
- Political risk
What are the 3 approaches to managing credit risk?
- Credit control policies
- Non-recourse debt factoring (selling receivables)
- Insurance
What is political risk?
Risk that action by a foreign government will affect the position of a company
What are the 6 actions a government might take to prevent exploitation of its country by mulitnationals?
- Quotas on international company trade
- Tariffs on imports
- Non tariff barriers (e.g. extra checks)
- Restrictions
- Nationalisation
- Minimum resident shareholding quotas
What are the 3 strategies for managing political risks?
- Negotiations with host government
- Overseas/ outsourced production strategies
- Management structure (JVs with domestic)
What is a spot rate?
Exchange rate right now
When a £ for $ exchange rate is quote $X - $Y : £1, what do X and Y represent?
We can buy $X for £1, and sell $Y for £1
What is the trick for remembering which of $X - $Y : £1, represent buying and selling $?
We always lose out - sell rate will always be higher than the buy rate, meaning we receive less £ for $ when selling and have to pay more £ for $ when buying
What is a tick?
£/$ 0.0001 movement in foreign currency
When a £ for $ exchange rate is quote $X - $Y : £1, what is the spread in ticks?
Y - X
If the £ strengthens against the $, what does that mean for the $X - $Y : £1 exchange rate?
X and Y become higher - the £ can buy more of the $ than before
If the $ weakens against the £, what does that mean for the $X - $Y : £1 exchange rate?
X and Y become higher - you need more $ to buy £
What is the cross rate?
The exchange rate between two currencies being use to calculate the exchange rate between those two currencies and a third
What are the 3 types of currency risk?
- Transaction risk (changes in FX on short term credit transactions)
- Economic risk (long term risk of trading with particular foreign countries)
- Translational risk (generating accounting losses when translating foreign assets into functional currency)
What is the balance of payments?
The difference between a country’s overseas earnings and spending