Here the banks will use the forex rate on which they are willing to buy or sell the currency with in a month or more after the transaction.3
It can be seen that due to the volatile and unpredictable nature of the forex markets during times of political or economic crisis both these markets carry a considerable risk for the multinational firms. The preceding discussion in the other sections will assess the types of strategies which can be used to avoid these risks and their feasibility in the short and long term.
There are a number of risks facing VFM right now in terms of the foreign exchange and political risks involved here. These can Credit risk , Liquidity risk , Solvency risk , Operational risk , Market risk and Interest rate risk. (Aharony, 1986.Risks like operational risks (which have been defined by the Basel Committee(Basel II) arise from 'inadequate or failed processes, people and systems or from external events'.
( Hsaio 2008) .Operational Risks cover a wide category of risks which pertain to human error or technical deficiencies.(Black,1972) and are related to all other types of risk such as capital needs, inflation, concentration of revenues (by customers, products, geographies, etc.) new competitive conditions and environmental remediation obligations(reinforced by the new concept of Corporate Social Responsibility).(Black,1972). However more serious risks pertain to losses which arise due to the failure of the obligator to perform(Credit Risk) and such losses are reported to be responsible for more that 50% of yearly business losses.(Black,1972).Today the current lending practices pertaining to credit risk management methodology have made considerable progress.
Another type of risk is the market risk which related to the unpredictability surrounding future earnings, because of the volatile changes in the value of financial instruments (which again accounts for 25% of yearly bank losses) ( Staikouras 2000).Reporting risk is different from market risk and credit risk as its primary focus is on derivatives and other financial instruments and is related to the problem of Accounting Risks which are caused by the likelihood of wrongly perceiving or estimating the amounts of risk arising out of their accounting assumptions and methodologies( Staikouras 2000).However the tendency of financial institutions to suffer from Accounting risk, can be remedied by care in the preparation of financial statements.(like appropriate disclosures related to estimates contained in the financial statements) .(Black,1972,Chen 1983)
Modern Market Risks are no longer defined by outright exposure and