International trade is conducted by multinational corporations. Due to the fluctuations of the currency in different countries, multinational companies are faced by the risk management problems. There are several methods in which a company can manage its risks…
From the results obtained the best financial risk instrument is determined and recommended (Aswath, 2008).
A multinational company is a company that conducts its trade between two or more countries. To conduct the business, a set of rules and regulation are laid down by international organizations and the countries where these organization conduct business. One common effect is the fluctuation of different currencies. The volatility affects the profitability of international trade. Also due to the currency volatility, there is a very high probability of the traders incurring loses on future sales.
The formation of any multinational company is rigorous and most of the companies are run as joint ventures, mergers between two companies, private limited companies, public limited companies, licensing agreements among others. Corporate finance deals with the making of appropriate financial decision for the company. These decisions are made using analytical tools. These tools help in the maximization of corporate value and in the management of the firm's financial risks. The decision made may be classified as short term or long term. Long term decisions involve capital investments decisions while short term decisions involve managing the working capital.
Financial risk management, aids in evaluations of risks and developing strategies to manage these risks. In risk evaluation, the nature of the risk is determined by evaluating the impact of the exchange fluctuation on the corporation and the nature of the currency one is trading with. Risks can be managed/hedged using financial instruments. These instruments include interest rates, commodity prices, stock prices and foreign exchange rates. The most effective way to manage financial risk is by the use of derivatives that trade on the financial markets. These derivatives are traded using instruments such as futures contract, Forwards contracts, swaps and options.
Due to the nature of the international trade, companies are exposed to different financial risks. This is because of the ever fluctuating currency values. These risks can be hedged using financial instruments. The finance manager must carefully study these financial instruments and determine the best instrument to use; this again creates a problem in the decision making. The choice of instrument to use is not easy to make as over the counter transactions are not open and the availability of vital information about the behaviour of different commodities and currencies in the short and long run is not readily availed.
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“Multinational Financial Management Essay Example | Topics and Well Written Essays - 3250 Words”, n.d. https://studentshare.net/miscellaneous/306668-multinational-financial-management-essay.
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