Political risk transpires when a country’s government unexpectedly changes its policies, which now negatively affect the foreign company. These policy changes can include such things as trade barriers, which serve to limit or prevent international trade. Some governments will request additional funds or tariffs in exchange for the right to export items into their country. Tariffs and quotas are used to protect domestic producers from foreign competition. This also can have a huge effect on the profits of an organization because it either cuts revenues from the result of a tax on exports or restricts the amount of revenues that can be earned. Although the amount of trade barriers have diminished due to free-trade agreements and other similar measures, the everyday differences in the laws of foreign countries can influence the profits and overall success of a company doing business transactions abroad.In general, organizations engaging in international finance activities can experience much greater uncertainty in their revenues. An unsteady and unpredictable stream of revenue can make it hard to operate a business effectively. Despite these negative exposures, international business can open up opportunities for reduced resource costs and larger lucrative markets. There are also ways in which a company can overcome some of these risk exposures. For example, a business may attempt to hedge some of its foreign-exchange risk by buying futures, forwards or options on the currency market. They also may decide to acquire political risk insurance in order to protect their equity investments and loans from specific government actions. What a company must decide is whether the pros outweigh the cons when deciding to venture into the international market.
It refers to the risks imposed by interlinkages and interdependencies in a system or market, where the failure of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring down the entire system or market. It is also sometimes erroneously referred to as "systematic risk".
Transcript of "Exposure to risk"
Exposures in International
Presented By :Jaswinder singh
M.B.A 4th Sem
Meaning of International finance:
• The economic interaction among different
nations involving the monetary payments and
the exchange of currency.
• A summary of international trade undertaken
by a particular nation is given with the balance
Meaning of Exposure
• Exposure is a measure of the extent to which a
person faces foreign exchange risk
• In general, there are two types of exposure:
accounting and economic
– Economic exposure is more important
• Transaction exposure:
– “A transaction involving purchase or sale of goods
or services with the price states in foreign
currency is incomplete until the amount in dollars
necessary to liquidate a related payable or
receivable is determined”
• Accounting exposure is:
– Of concern to MNCs that have subsidiaries in a
number of foreign countries
– Important to people who hold foreign securities
and must prepare dollar-based financial reports.
• Economic exposure measures the risk that the
value of a security will decline due to an
unexpected change in relative foreign
• Security analysts should include expected
changes in exchange rates in forecasted cash
• Market risk
The risk that the value of a portfolio, either an investment portfolio
or a trading portfolio, will decrease due to the change in value of
the market risk factors. The four standard market risk factors are
stock prices, interest rates, foreign exchange rates, and commodity
• Legal risk
The risks that counterparty are not legally able to enter into a
contract. Another legal risk relates to regulatory risk, i.e., that a
transaction could conflict with a regulator's policy or, more
generally, that legislation might change during the life of a financial
• Financial risk an umbrella term for multiple types of risk associated
with financing, including financial transactions that include
company loans in risk of default. Risk is a term often used to
imply downside risk, meaning the uncertainty of a return and the
potential for financial loss.
• Hedging Risk:
A risk associated with the limiting or off setting
probability of loss from fluctuations in the prices of
commodities, currencies, or securities.
• Systemic risk
The risk of collapse of an entire financial system or
entire market, as opposed to risk associated with any
one individual entity, group or component of a system.
• Operational risk
A risk arising from execution of a company's business
functions. It is a very broad concept which focuses on
the risks arising from the people, systems and
processes through which a company operates. It also
includes other categories such as fraud risks, legal risks,
physical or environmental risks.
• Banking :Extent to risk.
• Finance: Amount that one can lose; generally
cash and notes payable.
• International Finance: In foreign exchange
and futures market trading, the potential for
suffering a gain or loss from fluctuations in