About This Chapter
Risk Management in International Finance - Chapter Summary
In this chapter, discover risk management practices and strategies in the field of international finance. Follow along with each lesson to learn about risk premiums, exchange rates, the home currency approach, and the importance of time in financial reporting. Our lesson materials stream online 24/7, so you can access them whenever it fits your schedule, and you can always go back if you need a quick recap on these finance topics.
At the close of this chapter, you will have learned enough to do the following:
- Describe political risk as it relates to international corporate finance
- Identify the models and formula for interest rate risk calculations
- Analyze how the three C's of credit affect credit worthiness
- Relate the formula used for risk premium calculations
- Examine the function of the inflation rate and the equation of exchange
- Explain approaches to international capital budgeting
- Compare the liability of foreignness with the cost of doing business abroad
- Point out forms of exposure in exchange rate risk
- Assess the theory of loanable funds
- Summarize the time period principle and periodic reporting
- Detail the use of the yield curve
- List different insurance coverages for various types of risk
- Analyze the international finance strategy BMW used for exchange risk
1. Exchange Rate Risk & Forms of Exposure
International businesses face certain risks, including the risk of exchange rates being unfavorable. In this lesson, we'll explore forms of exchange rate exposure, including short-run, long-run, and translation exposure.
2. International Corporate Finance & Political Risk
Multinational corporations face risks to their financial bottom line thanks to politics and political risk in different countries. In this lesson, we'll look at common sources of political risks for companies and how they can impact companies.
3. Interest Rate Risk: Definition, Formula & Models
Interest rate risk is really the risk of two different events (price reduction and reinvestment rate reduction) caused by a change in interest rates. Interest rate risk affects bond investments, but the good news for bond investors is that it can be mitigated or eliminated.
4. International Capital Budgeting: Approaches & Exchange Rate Risk
International businesses face risks that domestic companies don't. In particular, the exchange rate can pose a risk for multinational corporations. In this lesson, we'll examine the home currency approach and how it can help mitigate this risk.
5. Cost of Doing Business Abroad vs. Liability of Foreignness
In this lesson we'll address the costs of doing business abroad (CDBA) and the liability of foreignness (LOF). We'll discuss and analyze each and look at their effects on international corporations.
6. Insurance Coverage for Various Types of Risk
Businesses operate in a world of risk. One of the best ways to manage risk is through insurance. In this lesson, you'll learn about the types of insurance coverage available to businesses to help them manage their risks.
7. Case Study: India's Venture into Interest Rate Futures
In this lesson, you will review a case study on interest rate futures in India. You will identify important issues, including the decision-making process, the strategy developed, and the end result of using these futures as a derivative in India.
8. International Finance Case Study: BMW & Exchange Risk
Unfavorable exchange conditions can force an international business to choose between raising prices or accepting revenue reductions. This is a case study of how German automaker BMW reduced their exchange rate exposure.
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Other chapters within the Finance 302: International Finance course
- Foundations of International Finance
- The Balance of Payments in International Finance
- History of Money & Finance
- Globalization & Multinational Firms
- Foreign Exchange Markets
- Currency Changes in International Finance
- International Capital Markets
- Hedging & Strategic Decision Making
- Capital & International Financial Management
- International Financial Scams & Crises
- Required Assignments for Finance 302