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The risk management process: Business strategy and tactics - Essay Example

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INTERNATIONAL FINANCIAL STRATEGIES Date Introduction The era of globalisation has seen businesses extend their operations in foreign markets making them be classified as multinational enterprises. In this course, multinational companies face many challenges…

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The risk management process: Business strategy and tactics

Foreign exchange risk is the unanticipated changes in the exchange rates that could lead to losses or gains for a firm. Multinational companies face three different types of foreign exchange risk: transaction risk, translation risk and economic risk (Eun & Resnick 2005). Translation risk is the risk that occurs when firms consolidate the financial statements foreign operations with that of the home country. For consolidation purposes, the financial statements of subsidiaries are restated from the foreign currencies to the functional currency. The translation risk is therefore the accounting risk involved when restating the foreign currencies to the functional currency for consolidation purposes (Eun & Resnick 2005). Transaction risk on the other hand is the risk of changes in exchange rates on the value of foreign currency transaction that the firm had entered into. Since multinational companies engage in credit transactions where payment for goods and services are made at a future date, there is a likelihood that the exchange rate at the transaction date will be different from the exchange rate on the date when the financial obligations are settled. The differences in the exchange rates may make multinational enterprises earn different cash amounts to the cash expected on the transaction date. Future cash flows of the enterprises are therefore at risk. ...
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