Introduction
A company going international will face or encounter risks that are different from those faced in the home country. The risks in International transactions include foreign exchange risks and political risks.
Foreign exchange involves things like currency shortages, depreciation, and increase of public debt or exchange rate fluctuations. Proper strategies should be adopted to cover this risk. If the risk is not well covered, it will affect the cash inflows and outflows and eventually profitability or even operations of an enterprise. Strategies adapted can be Strategic actions, operational tactics, and financial tactics.
Several instruments are used to cover this risk, although not available in all markets. Their availability in the market depends solely on the development of the economy in question, that is, financial infrastructure and services offered by the banks operating within it. Therefore, a risk management strategy requires one to be effective, have a good understanding of financial instruments and, above all, in emerging issues in the economy where you are investing. It is important to access these risks thoroughly, identifying the potential risks and assessing the strategy available to reduce them.
Exchange rates are influenced by several factors, including inflation rates, income levels, interest rates, government policies, expectations of economic events or changes, natural disasters or events and the effects of currencies fluctuations can have impacts at different levels.
Techniques for covering risk
- The balances to both intra-group and third party are matched. The companies match the inflows and outflows in different currencies covered by the business so that it is only necessary to deal on the currency markets for the unmatched proportion of the total transactions. It ensures that purchases and sales in each currency and deposits, given and taken in each currency, are in balance by the amount and by maturity.
- Leads and Lags: the acceleration or slowing payments or receipts when a change in currency rates is expected
- Invoicing currency: importers and exporters of goods and services charge in the currency at a favourable rate.
- Insurance: a company covers for a sudden change or total impasse in the availability of foreign currency on the maturity date.
- Futures: is a contract based on an order placed in advance to buy or sell an asset or commodity. The price will be fixed when the order is placed, but payment for the asset is not required until the delivery date. In this case, the buyer puts aside some cash as a form of assurance that he will pay or have the ability to pay when the time comes.
- Spot foreign exchange is a binding obligation to buy or sell a certain amount of currency at the current market rate for settlement in two business days
- Option is the right to purchase or to sell a certain asset at a preset price on or before a specified date.
- Swap is an agreement exchange specified assets or cash flows at fixed intervals, with the terms initially set so that its present value is zero
- Netting: involves associated companies that trade with each other and refers to potential flows within the group of companies. The companies calculate the total exposure by offsetting the receivables and payables, in the same currency, for the same dates
From the techniques discussed, the company will use almost all of the above since Australia has an active foreign exchange market.
Political risks
Some countries may experience major political instability, which could result in defaults on payments, exchange transfer blockages, nationalization or confiscation of property. The civil disorder may affect personal security. Unlike third world countries, Australia is a country with predictable political risks. There are very few political risks.
Foreign exchange settlement in Australia
In Australia, banks local and all foreign banks have decentralized their foreign exchange. However, some of the foreign banks have centralized foreign exchange settlement processes at their head offices, and therefore it takes a long period to settle the transaction. In such cases, the full financial and legal liability for foreign exchange settlement risk lies outside Australia, and most of these banks’ foreign exchange settlement risk was covered survey by G-10and reserve bank of Australia
Risk being anything that threatens or limits the ability of a business to achieve its goal and objectives. Risk management is a process of thinking systematically about all possible undesirable outcomes before they happen and setting up procedures that will avoid them, minimize or cope with their impact. The in question should therefore plan how to cope with the discussed risks above.
References
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