International Business Finance Essay Example | Topics and Well Written Essays - 1500 words

International Business Finance - Essay Example The different structures of currency (fixed, pegged, etc.) also influence the risk. Fluctuations in forex rates have a direct impact on the sales revenues, and thus the profits of importers and exporters. This impact can be at all the three levels; short-run, inter-mediate term, and the long run. There are 4 factors that influence the fluctuation of forex rates: It is defined as the elasticity of the real domestic currency value of Assets and Liabilities, appearing in the financial statements to unanticipated changes in exchange rates. This value serves as a standard to evaluate discounted cash-flow evaluation. It is used for income tax purposes and for legal obligation to combine financial statements. Accounting exposure cannot be managed. Selection of valuation technique is immaterial as the choice doesn't affect any real cash flow except for taxes; the only correct method is economic value anyway. For simplicity and a consistent method current rate method is used. It is defined as the elasticity of the real domestic currency value of Assets and Liabilities, when assets and liabilities are liquidated with respect to unexpected changes in exchange rates for exporting, importing, or import-substituting firms. As the name suggests, it is the exposure that rises due to trading of goods and services, borrowing and lending funds, etc. Forex transaction exposure can be dealt by with the usage of contractual, operating, and financial hedges. Contractual hedges employ the forward, futures, money and options market. Operating and financial hedges employ the use of risk-sharing agreements, some types of financial derivative, and other strategies. In this part, we focus on contractual hedges. Hedging implies replacement of an unlock future exchange risk with a presently known exchange rate where alternatives such as Forward/Future Market Hedge, Money Market Hedge, Risk shifting (price all products in home currency), Pricing Decisions, or Currency Risk Sha ring can be used. Operating Exposure: It is defined as the elasticity of the real domestic currency value of Assets and Liabilities, or future operating incomes to unforeseen changes in exchange rates. They are based on the extent to which the value of the firm - as measured by the present value of its expected cash flows. Scenario I: Closed Economy Internal costs and prices are unaffected by exchange rate changes, therefore no exports or imports. Scenario 2: Open Economy Small, open economy and an international price for all goods and factors increase by 45%. Then, except for contractual exposure effects. There are two widespread misunderstandings about forex as follows: a) Only organizations having international operations are exposed to it b) Quoting prices for trade in local currency would eliminate the exposure. The true assumption that can be concluded from the two concepts is the fact that the structure is fairly static; however, it is not so. Competition from a foreign firm or exports may eventually cause problems for