Question

“Some of the financial techniques and strategies are necessary for the efficient operation of an international business. Problems inherent to these firms include multiple currencies, differing legal and political environments, differing economic and capital markets, and internal control problems. The difficulties arising from multiple currencies are stressed here, including the dimensions of foreign exchange risk and strategies for reducing this risk.” Elucidate.

Answer 1

In international business buyer and a seller who are in different nations rarely use the same currency. Payment is often made in the seller's or buyer's currency or in a third mutually acceptable currency. The main risks associated with foreign trade are the uncertainty of future exchange rates. Foreign exchange risk refers to the financial risk faced by an investor investment's due to the changes in currency exchange rates. Although it is an unavoidable risk of foreign investing, however can be mitigated considerably with the usage of the money markets, foreign exchange derivatives such as futures contract, forward contracts, options and swaps or with operational techniques like currency invoicing, lagging and leading of receipts and payments, and exposure netting.