Downloaded 384 times
Uploaded byreynolds
MANAGING RISK IN INTERNATIONAL BUSINESS
The document discusses techniques for managing risk in international business. It outlines three steps: 1) identify individual risks, 2) assess risk magnitudes and exposures, and 3) incorporate risk assessments into decision making. It then introduces political risk and tools for financial decision making. A new framework is described that overcomes shortcomings of traditional techniques by using market data and compatible parameters with modern portfolio theory. The framework generates new decision making parameters by establishing accounting disciplines and linking income/expenditures. It assesses country-specific financial risk and provides examples of new parameters like risk premiums. Performance of international portfolios from 1982-1991 is analyzed for money markets, bonds, and equities.
More Related Content
Similar to MANAGING RISK IN INTERNATIONAL BUSINESS
MANAGING RISK IN INTERNATIONAL BUSINESS
- 1. MANAGING RISK ININTERNATIONAL BUSINESS Techniques and Applications
- 2. The Three Stepsto Effective International Risk Management Identify the individual risks Assess risk magitudes and exposure levels Incorporate the risk assessment in the decision making process
- 3. Political Risk DefinitionSources Assessment techniques
- 4. Modern Tools ofFinancial Decision Making Required input: MARKET DATA Mean-variance analysis Contingent claims analysis Modigliani-Miller
- 5. Shortcomings of TraditionalTechniques Unsuited to modern financial decision making data parameters applications Generally imprecise and difficult to apply
- 6. The New FrameworkOvercomes These Shortcomings Uses market data (international prices) Generates parameters compatible with modern portfolio and option pricing theory
- 7. Generating the Data: Four Steps Establish accounting discipline Define income flows Define expenditure flows Link income and expenditure to the balance sheet
- 8. Important New DecisionMaking Parameters Macroeconomic profits Market value of the economy The economy’s rate of return The economy’s financial risk premium The economy’s systematic risk (beta)
- 9. Assessing CountrySpecific Financial Risk Estimate standard deviation of country rate of return Estimate total amount of foreign debt and its duration Apply the information in the Black-Scholes option pricing formula
- 10. New Parameters: ExamplesThe financial risk premium Insolvency or illiquidity The maximum debt level Implied volatility
- 11. A Big QuestionDOES IT WORK?
- 12. CLARK vs . EUROMONEY The Forecast 1988 The Clark forecast: Euromoney , September 1988, page 234 60 countries The EUROMONEY forecast: Euromoney , September 1988, page 235 117 countries
- 13. CLARK vs. EUROMONEYThe Result 1993
- 14. Estimating Systematic RiskConstruct the World Index Estimate macroeconomic market value for each country Sum the market values of all countries to create the world index Regress country returns against percentage change in world index to estimate Beta
- 15. Performance Measurement INTERNATIONALPORTFOLIOS
- 16. Money Market Portfolios1982-1991
- 17. Long Term GovernmentBond Portfolios 1982-1991
- 18.
- 19. Excess Return toRisk for Selected Portfolios 1982-1991
- 20. Outline Brief reviewof traditional international risk analysis Presentation of new techniques Applications direct investment portfolio investment cross border loans
Editor's Notes
- #2 1) International business risk is a wide ranging concept. Examples: - for the exporter it can mean currency risk on export transactions, or the imposition of tariffs, and quotas; - for the direct investment, merger or an acquisition it can mean losses or reduced profits due to macroeconomic mismanagement, exchange controls, expropriation or other types of government intervention; - for the lender it can mean payment delays and default; - for the portfolio investor it can mean market volatility, currency fluctuations, transaction costs such as brokerage fees, stamp duties, taxation and other regulations. The possibilities are limitless. 2) The international economic and financial consultant should be aware of what the risks are and how they can be assessed and managed. Examples: - in a foreign acquisition, the cost of possible losses due to government intervention or the volatility of cash flows caused by currency fluctuations should be factored into the evaluation process; - legal counseling is most effective when it anticipates potential conflicts and and advises on how they can be avoided or their effects minimized.