Possible Risks of Foreign Currency Exposure - Assignment Example

Examine possible risks of foreign currency exposure for your company and prepare a strategy for how each of these risks can be managed. Please bespecific and consider all possible implications to your company. In the business expansion from one country to another, there remains a risk of foreign currency which rises from the conversion of one currency to another. It arises when an investor or foreign company expands its business dealing and investment across its national boundaries. For instances if Pfizer pharmaceutical expands its business operations in Vietnam, the return of Pfizer pharmaceutical investment will be affected by both factors of conversion first by the change in prices of stocks in Vietnam and by the change in currency value rate, as returns of Pfizer pharmaceutical will be converted from vietnami’s dong to US dollar. Consider if the return in Vietnam pillories is 10% of the total investment but on the other hand if currency that is Vietnam’s dong depreciates also by 10% then the gain to corporation will be nothing, with the same token if currency depreciates by more than 10% the Pfizer pharmaceutical will face loss and if their currency appreciates by 10% or more the Pfizer pharmaceutical can also yield abnormal profit. So, there exists a risk of foreign currency in case of business exposure to Vietnam. Though currency risk prevails in business exposure but companies can overcome this currency risk and can protect their profit even in crisis too. Following are some of the possible risk aversion strategies for business expansion. The first and foremost solution is to actually measure the volume of risk through analysing the company’s exchange flows. In the exchange process when currency transaction takes place it is advised to negotiate payment of currency in your own local currency in this case that is US dollar. Trading in your local currency will reduce the risk of conversion rates in the form of exchange rate shocks besides the expected fluctuations will be bore by the other party while your returns will not be affected by this risk. When companies are experiencing foreign exposure they should keep an eye on the changing currency rates and whenever possible they should take optimum advantage of the current rate. In reducing currency exchange rates, companies should keep dates for payments close to the signing of the contract date, this will reduce risk of fluctuations. Keeping certain amount of deposits as security with a defined ratio of contract size can also help minimizing risks. With the help of brokers and foreign exchange solutions companies can lock in future exchange rates and buy contracts with future perceptions but there is no exact solution to the failure of this future exchange rate so, instead of open period, short period for bid and contracts will limit the risk of currency exposure. Companies should double check foreign exchange rates when they are setting up prices because selling product in a foreign country mean payments will be collected in foreign currency, but if the exchange rate is low with lower prices the company will end up in loss. So, setting up prices is also a key factor in reducing loss.(Prinzel, 2012) The solution can also be to diversify the exchange rate which will also reduce risks. Since Pfizer pharmaceuticals has its business exposures in almost 42 countries, this diversification can help reducing currency exchange risks as if Vietnami dong depreciates, exchange rate in other country may appreciate so, Pfizer pharmaceutical already entails this solution which will further help reducing risks. Pfizer can also neutralize its risks through managing its dealings as currency in Vietnam depreciates, it will help if Pfizer purchase its raw material from foreign supplier who are dealing in Vietnami dong that will make product cheaper as payment is made in dollars. On the other hand it will neutralize the risk of foreign currency exposure too.(Alan C. Shapiro, 1982) 2. Evaluate the basic functions of the international banking system and financial market (such as bonds, equity, and money markets) and provide a plan for using these financial markets to finance your global operations. Financial markets are the market places where buyers and sellers par take their role in the exchange of assets which consists equities, currencies, derivatives and bonds. These financial and banking markets have their rules, regulations, costs and benefits. These markets have their basic defined functions which are: Capitals markets are the foremost markets for an investors where public and private securities are purchased and sold with the motive to raise their funds and value. In the capital market government and private corporations place capital to finance their business operations and long term investments (Sheffrin, 2003). Through capital markets corporations generate money and revenue by the sale and purchase of securities. Capital market is composed of stock markets which allow corporation to purchase and sell shares in the market. Stock markets provide capital to companies and investors with potential profits which depends on company’s performance. Pfizer has a strong base of its market operations 42 countries which will encourage investors in stock market of Vietnam. Beside stock markets, Pfizer can get benefits and a huge share of debt investments from investor in bond markets. The asset value of Pfizer Company is very good with its expanded business exposures around the world by which company can yield a huge chunk of investment (Tesfatsion, 2012). Money market can also be a platform for financing global operations of Pfizer pharmaceuticals. In money market financial instrument of high liquidity with short maturities, in this regard money market can help in financing Pfizer pharmaceuticals operations in Vietnam in the short run. This borrowing and lending of money in the short run will also help in assembling company set up with high liquidity and with negotiable certificate of deposits and with acceptance of banks too (Fabozzi, Mann, & Choudhry, 2002). Money market is a safe place for investors and companies because of its short term returns and high liquidity so, money market can also help financing Pfizer pharmaceuticals business exposure. Derivative market is a complicated process of managing derivatives. In derivatives the worth of derivatives is derived from the underlying assets of the company. Derivative market is a strong tool for financing exposure because of its effectiveness in managing risks and hedging finances. In this respect forwards, SWAPS, futures and contracts for difference (CFDs) can be used as a strategy(Chiu, 2010). Another foray of financial markets is forex and interbank market where currencies are exchanged among banks and financial institutions. This is the most liquid and the largest market in the world, in this market most of the trade is conducted by banks for big corporations (International Business Times AU, 2011). With its liquidity and gains it can prove to be a good platform for Pfizer pharmaceuticals to finance its business exposures in Vietnam. 3. Present a financial strategy to support long-term financing of operations for possible expansion of your MNC (taking into consideration portfolio management, capital budgeting and foreign direct investment decisions). Market expansion of Pfizer pharmaceuticals require managing company portfolio, managing costs, managing uncertainties, risks and foreign direct investment decisions. These issues require strategies for setting up appropriate market prices, introducing new and attractive products. Apart from strategic decision, expanding business exposure to Vietnam requires extensive analysis of market demographics and research with respect to test new market strategies. Setting up an industry in demographics requires significant time for maturity and attention in Vietnam. So, for growth Pfizer pharmaceuticals can start a new chain in Vietnam capital which will help in managing expanded business from USA, after the success of one chain and market reaction Pfizer can further expand its operation in the whole country. It is evident that setting up new expansion will be more costly and risky while after one chain duplication will be easy and efficient. Chain of Pfizer in Vietnam capital will help arranging management duties and training of staff. Along opening a chain, franchise agreements or licensing can also induce business exposure. Franchise and licensing will cost less in training and management and is less risky too. Beside opening a chain and licensing, another option for business exposure is a decision of foreign direct investment in the form of merger or acquisition. Pfizer pharmaceutical can either merge with another firm/ company or can acquire the running pharmaceutical company which will expand the customer base of Pfizer pharmaceuticals, it will also enhance the operational efficiency of the company. Merger/acquisition will provide new distributors, new market, new venues and new targets and more revenue(Community Futures Stuart Nechako, 2011). 4. Provide final recommendations based on both your findings and your initial assessment of opportunities and risks on the three dimensions of international finance, economic trends of the country, impact of globalization, and the monetary system. Vietnam has been a new venue for investment since its trade liberalization policies after 2000. Though Vietnam is a Socialist Republic but with its open economy policy has attracted investors from all around the world. In this today’s world of globalization and competition new venue and markets are the only source of growth for any corporation, Vietnam has the developing economy whose currency in Vietnam dong equates one US dollar at 21,099 dong which is very low; this can also be a positive point for investor if currency is exchanged investor can have multiple benefits. Pfizer Pharmaceuticals has its high assets value and respect in the financial markets. This underlying value of its assets will provide numerous dimensions of international finance for business exposure in Vietnam. References Alan C. Shapiro. (1982). Multinational Financial Management (Boston: Allyn & Bacon, 1982) p.242. 242. Chiu, M. (2010, September). Derivatives markets, products and participants: An overview. 27-29. Community Futures Stuart Nechako. (2011, August 2). Business Expansion: Expansion Strategies. Fabozzi, F. J., Mann, S. V., & Choudhry, M. (2002). The Global Money Markets. Wiley Finance, Wiley & Sons. International Business Times AU. (2011, February 11). What is Foreign Exchange? Prinzel, Y. (2012, August 14). How to Mitigate Currency Risk in Your International Business. Retrieved from American Express. Sheffrin, S. M. (2003). Economics: Principles in action. Pearson Prentice Hall. Tesfatsion, L. (2012, March 5). Introductory Notes on Financial Markets. Retrieved from http://www2.econ.iastate.edu/tesfatsi/finintro.htm Read More