Large Multi-National Corporation and Exchange Rate Risk - Essay Example

In situations where a company is highly dependent on international sales, the firm must utilize advanced financial tools such as hedging in order to diminish the exchange rate risk. Hedging is protecting a long position in one asset while being short in another in order to reduce overall risk (Teweles & Bradley & Teweles, 1992, p.537).

2) What would be the major issues and complications involved if you decided to set up some trade with a company in Afghanistan?

A country such as Afghanistan is a third-world country with / a developing economy with major problems for potential investors from the United States or any other G8-developed nation. In the case of the United States, the current War on Terror declared by George Bush Jr. created a cultural barrier for American companies to penetrate this market due to resentment from the population against anything that is American. In general terms, the civil warfare that continues in this nation due to the Holy War makes it a security risk for any company due to suicide bombers and other Para-military activity.  The economic state of this country is weak, thus its citizen lack purchasing power.

3) What country (ies) do you think is (are) presently attractive for U.S. corporations seeking foreign direct investment opportunities? Why? Give the top 3 countries and answer why for each

Three countries that should be targeted by United States corporations as foreign direct investment opportunities are India, the United Kingdom, and Japan. India has the second largest population in the world after China with over one billion inhabitants. The size of the market is huge which is a good characteristic. Another thing that makes India attractive is the educational level of the population which is good and the fact that the country has an established infrastructure to export professional services via a telecommuting system.

A second country that is a good target for the international expansion of American firms is the United Kingdom. The monetary unit of the UK, the pound, is one of the strongest units in the world. The culture of the UK is very assimilated with the US culture which is a very good factor. The United Kingdom has a population of 60,776,238 people enjoying a real gross domestic per capita of $33,238 (CultureGrams, 2008). The third county chosen for international expansion is the large island of Japan. One of the best characteristics this country has which makes it very attractive is its high population density and history of commercial trade between the United States and Japan.

4) In light of the Enron, Worldcom, and option backdating scandals, do you think U.S. equity markets are really that much cleaner and more reliable than stock markets in the rest of the world?

The United States investment market whose heart and soul is located on Wall Street New York saw its credibility severely damaged after Enron and Worldcom and other accounting scandals. The Security Stock Exchange and the U.S. Senate acted immediately with the creation of the Sarbanes-Oxley Act. The Act is anti-fraud legislation that gives credulity to the stock market by instilling new audit mechanisms, accountability to executives, and harsh penalties to companies with fraudulent accounting activity. An investor in the United States is assured their money is protected. An investment in the United States is much safer than in other countries. In China for example the government intervenes in its stock market. This does not occur in the US since there is a separation between the private market and governmental power. The Sarbanes Oxley creation was an exception to the general rule.