International Finance Chapter 17

It also requires more of an investment and commitment by the international company which creates a higher risk. There is also the down side of having difficulty managing local resources.

The goal of this case is to help Sandra Meyer develop a presentation to address Henry Bosse’s concerns about international investments. The general idea is to demonstrate to Henry the benefits of international diversification, if any. To achieve this goal, you need to have a view on 1) the impact of foreign exchange (FX) rates on the return and risk of international investments, and 2) the impact of having more assets on the return and risk of the investment portfolio To form views on these two points, answer the following questions: I. The impact of FX rates on the risk and return of foreign investments 1a) Using data in Appendix A, calculate the

As previously identified, there are also “non-legal/extra-governmental” political risks which could bring unexpected upheaval to foreign firms. Macro political risks such as the threat of violence, corruption, war or military coup, political instability and terrorism are all direct threats to foreign investors.

With bringing your factories to foreign countries you get cheaper labor land and can avoid many taxes.

Governments might change or new political parties might be elected, but the concern of the multinational corporation is the continuity of the set of rules or codes of behavior and the continuation of the rule of law—regardless of which government is in power.

2. Some risks that are common between domestic and international funds are: losing money and management risk. Any investment has some type of risk. Losing money is the first risk that every investment has whether it is domestic or international. Management risk is the bad management decisions that a company makes. Some unique risks that only international funding has are: economic risk, country/regional risk, and currency risk. Currency risk is the chance that the value of a   foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in the currency exchange rates. Economic risk is the stability of a country’s economic. Country/regional risk is political, financial troubles, and natural disasters that will affect the value of securities issued by companies in foreign countries or regions.

Multinational Corporations (or MNC’s) are businesses with operations placed in various countries other than the home country where all functions are managed. Traditionally, it is up to the federal government to prevent these entities from abusing their power and violating International Law by implementing regulations. However, because of their transnational status, MNC’s are separate from the government, the state, and society; giving them the ability to act outside of public standards. This has caused problems in the international realm as it frees up opportunity for corporations to abuse their power due to a serious

why they need to try to find new economically friendly ways to produce their products which

c. Exchange rate risks: significant portion of revenue stream born currency exchange risk (peso vs. USD) regardless of geographical and product diversification. These risks were absolutely external and thus could have been hardly mitigated.

There is the risk of yielding less return than the costs of acquisition. This may result by under estimating the future value of Milagrol at the time of evaluating the purchasing cost. This can also be caused by lack of consideration of the changing dynamics associated with cost, income and market approaches of valuation. There is a risk of fluctuations in the exchange rates of the countries due to inflation. The inflated prices pose a threat to the valuation process in that unrealistic premiums can be made or established to maintain the market shares of the organization. Establishing the discount of the interest rates is also a challenge and may lead to the risk of incorrect valuation of the organization.

A risk analysis is a compilation of detailed factors weaved together to determine the likelihood of success or failure for a project, goal, or investment. Businesses use these to determine the viability or feasibility of a new product, initiative, or opening into a new market segment. A country risk analysis is simply the extension of a risk analysis to include an entire country. In essence, a country risk analysis is a tool used to identify the risks associated with opening a business, creating trade agreements, or investing in a country. A country risk analysis is very important because it takes into account many factors including the current and past political climate, economic risk, geography and climate risks, cultures, and laws pertaining to the country being analyzed. Often, countries are given a grade to enable a quick comparison to how risky investing in one country is compared to another country.

When investing internationally there are risks beyond the risk of individual securities or portfolios. There is liquidity risk, because it is often

Even though a company must invest a large amount of money to get started in a foreign country, this can have the long-term effect of lowering costs. by take advantage of large tax benefits. The company can also pay less for labour and other goods that may be needed for the production of products. This lowers the overhead for the company and helps it operate more profitably

This chapter focuses on three aspects of foreign investment analysis that are infrequently considered in evaluating domestic projects: the difference between project and parent cash flows; incorporating political risks such as expropriation and currency controls; and factoring in inflation and exchange rate changes in cash flow estimates. It also evaluates the various methods used to incorporate in the investment analysis the additional risks encountered overseas. These points are brought out in the process of working through the International Diesel Corporation Case. The ability to perform a capital budgeting analysis is one of the most valuable skills we can provide our

ABCO Corporation has a parts division in country A. Its assembly division is in country B, which has a higher tax rate than country A. To minimize the corporation's overall income tax, how should ABCO set its transfer prices between its parts and assembly divisions?