International Risk

Essay by samantha71University, Bachelor'sA+, October 2006

download word file, 3 pages 4.6

A corporation that operates in foreign countries must understand globalization and foreign financial risk. When a corporation operates on a global level, there are many financial risk factors that need to be taken into consideration. These risk factors include foreign exchange rates, differing interest rates from country to country, complex accounting methods for foreign operations, and foreign tax rates. To be successful at globalization, corporations must not only understand and recognize these risks but find ways to successfully manage them.

Globalization is the increasing integration of economies around the world, particularly through trade or financial flows. Globalization includes the practice of operating businesses in foreign countries. Over time, this practice has become more common due to technological advances and decreased trade barriers. Globalization permits businesses to reach much larger markets. Globalization allows businesses access to more capital flows, technology, cheaper imports, and larger export markets. While globalization brings about many great opportunities, it also carries the burden of increased financial risk.

One of the biggest financial risks of operating in foreign markets is the exchange rate. The foreign exchange rate is the rate of currency exchange, meaning one country's currency is traded for another's. The foreign exchange rate is expressed in two ways. Most commonly, it is expressed in the amount of currency required to buy one U.S. dollar. Or it can be expressed conversely, by how much a U.S. dollar can be exchanged for a foreign currency. This is an important risk in financial management because in order for corporations to invest or purchase globally, they may need to use the necessary foreign currency.

Another risk factor that affects globalization, particularly in international investment, is foreign interest rates. When investing, corporations want the highest interest rate. The global market with the best rate may receive...