Financial Risk Associated With International Business Essay

841 Words Dec 7th, 2016 4 Pages
As business becomes more globalized and trade continues to expand internationally, companies need to understand and reduce the risk associated with international business. Though there are many risks faced by companies when operating internationally, including political, financial, and cultural, this paper will specifically discuss the financial risk associated with exchange rates and how companies mitigate this risk through currency hedging.
Foreign Exchange Risks
Foreign exchange risk is “the risk that a business’s financial performance or position will be affected by fluctuations in the exchange rates between currencies”, and because foreign exchange rates fluctuations do not always act favorably, these fluctuations can have a negative impact on a company’s profitability and competitiveness (CPA Australia Ltd, 2009). Foreign exchange risk can affect any area of the business which is denominated in a foreign currency including imports and exports; capital expenditures; revenue from exports; other income, such as royalties, interest, dividends, etc.; business loans; offshore assets such as operations or subsidiaries; or foreign currency deposits (CPA Australia Ltd, 2009). However, managing foreign exchange rate risk doesn’t need to be time-consuming, and is especially beneficial to those companies whose core business competency is not in the financial market.
Using Currency Hedging to Reduce Foreign Exchange Risk
One method that firms can utilize to reduce foreign exchange…

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