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26 Cards in this Set

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Exchange Risk
Risk of financial loss due to an unexpected change in a currency's value
Two major FX mkts in US & UK
1) Interbank (Including brokers)

2) Futures/Options
2
Most important participants in FX mkts
1) Banks
2) Traders
3) Speculators
4) Hedgers
5) Arbitragers
5
Exchange Rates are influenced by
1) PPP

2) Interest Reates

3) Technical factros such as nat'l econ statistics and seasonal demand
3
Exchange rate
Value of one currency in terms of another.
Spot Rate
The exchange rate offered on the same day as the request to buy or sell foreign currency
Fwd Rate
An exchange rate contracted today for some future date of actual currency exchange.
PPP
The theory of exchange rate determination that states that the difference in prices of the same goods btwn countries will be eliminated by exchange rate changes.
Alternatives to minimize the exchange rate risk:
1)Risk avoidance
2) Risk adaptation (hedging)
3) Risk Transfer
4) Currency diversification
4
LIBOR
London Interbank offering rate
International Monetary System
A mkt among ctrl banks of the countries that belong to the IMF (founded 1944).
IMF objectives include:
1) Facilitation of balanced growth in int'l trade.

2) Promotion of exchange stability.

3) Making of financial resources available to members of the fund.
3
Country Risk
Chances of non-mkt events (political, social and economic) causing financial, strategic or personnel losses to a firm following FDI in a specific country mkt.
PEST analysis
Examining:
Political, Econ, Sociocultural & Technological conditions in countries that present investment opportunities.
Political Risk
Probability that political forces will negatively affect an MNE's profit or impede the attainment of otehr critical business objectives. Can examine in terms of micro and macro factors.
Macro Political Risk
Affects foreign enterprise in the same general way.
Micro Political Risk
Affects selected sectors of the economy or specific foreign businesses
Sources of political risk
1) Political philosophy of the gov't in pwr.
2) changing econ conditions
3) rising nat'lism
4) social unrest
5) terrorism
6) vested interests of local business groups.
7) newly created int'l alliances.
What type of financial forecast takes into account country risk?
APV
Power resources
The bargaining chips used by companies and gov'ts in investment negotiations.
Corruption
Defined by transparency int'l as 'the misuse of public pwr for private benefit'
Three steps in developing effective nego strategies.
1) MNE will evaluate its own position and that of the other parties to the negotiation.

2) The firm will examine the behavioural characteristics of the other parties iot better understand their style of negotiation.

3) The MNE will use this info to hammer out an agreement that is acceptable to both sides.
In nego, id of the other party's ________ is critical
acceptance zone
What categories of techniques do MNEs use to minimize political risk?
1) Integrative techniques

2) Protective / Defensive techniques
Integrative tehniques
Designed to help the company blend into the environment and become less visible. (attract less attn) by:

1) Using a name that is not id w/ and overseas company.

2) Developing good relations with the host gov't and otehr political groups.

3) Produce as much of the product as possible locally.

4) Hire and promote local personnel.
Protective / Defensive techniques
Designed to discourage a host country from interfering in multinational operations.

1) Conducting R&D disarda & importing bilgi as needed.

2) Limit the role of the local personnel to those operations that are not vital to the running of the facility.

3) Raise as much capital as possible from the host country and local banks.

4) Diversify production among a number of countries.