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Risk management in a multinational corporation

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  1. Introduction
  2. The concept of RISK
  3. Translation Exposure
  4. Transaction exposure
  5. Managing transaction exposure
  6. Managing translation exposure
  7. Foreign exchange risk and economic exposure
  8. The economic consequences of exchange rate changes
  9. Bibliography

MNCs are coming up in huge numbers nowadays. To earn the profits with minimal amount of risk has been a matter of concern for the investors. For this purpose management of risk is a very crucial factor. Pertaining to this context, this project has been undertaken with an objective to study the risk management strategies that can be used by MNCs. The various risks faced by the MNCs have been mentioned and the ways to manage them have been depicted in the project. Exchange Rate Risk is one of the Major risks faced by MNCs. A Multinational Corporation is a large business organization whose operations extend across international boundaries.Location-specific advantages include location-specific natural resources, manmade resources, low taxes; low wage costs, high labor productivity, or state supported monopolies Location-specific advantages can lead to sustainable competitive advantages. Ownership-specific and location-specific advantages by themselves are not sufficient to ensure the success of the multinational corporation over local firms. Market internalization (I) advantages accrue to the multinational corporation as it exploits its ownership- specific advantages in local and international markets.

[...] Characteristic Economic Effect of Exchange Rate Changes on MNC's Cash Flow Relevant Economic Devaluation Revaluation Categories Factors impact impact Revenue Parent company Parent company revenue impact revenue impact Export Sales Price Sensitive Increase Decrease Demand Price insensitive Slight increase Slight demand decrease Local Sales Weak prior import Sharp decline Increase competition Strong prior import Decrease Slight competition decrease Costs Parent company Parent company cost impact cost impact Domestic Inputs Low Import Content Decrease Increase High Import content/ Slight decrease Slight Inputs used in Increase export or import competing sectors Imported Inputs Small local market Remain the same Remain the same Large local market Slight decrease Slight increase Depreciation Cash flow impact Cash flow impact Fixed assets No asset valuation Decrease by Increase by adjustment devaluation % revaluation % Financial Management of Exchange Risk The one attribute that all the strategic marketing and [...]

[...] A money market hedge involves simultaneous borrowing and lending activities in two different currencies to lock in the rupee value of a future currency cash flow Risk Shifting: A company can avoid its transaction exposure altogether if the other company allows its price of the sale to be in the home currency. This practice does not however eliminate the risk; it simply shifts the risk from the seller to the buyer. Despite the fact that this form of risk shifting is a zero sum game, it is common in international business. [...]

[...] For those countries in which a formal market in local currency forward contracts does not exist, leading and lagging and local currency borrowing are the most important techniques. The bulk of international business, however, is conducted in those few currencies for which forward markets do exist. Evaluating alternative hedging mechanisms: Ordinarily, the selection of funds adjustment strategy cannot proceed by evaluating each possible technique separately without risking sub optimization; for example, whether or not a firm chooses to borrow locally is not independent of its decision to use or not to use those funds to import hard currency inventory. [...]

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