prentice hall, 2002chapter 10 daniels 1 chapter ten risk management and asset protection

1Prentice Hall, 2002 Chapter 10Daniels

Chapter TenRisk Management and Asset Protection


Chapter Objectives To appreciate the difference between risk and

uncertainty To grasp the idea of managing risk as an opportunity

versus risk as a hazard To learn about foreign exchange risk and the tools that

traders and companies use to manage it To understand the idea of political risk, its principal

types, and active versus passive management approaches

To profile competing views of the scope of intellectual property rights

To realize how companies establish and protect intellectual property rights


IntroductionFDI, particularly in the economies of

emerging markets, offers many opportunities

Sources of risk that especially menace international operations:• Fluctuations in foreign exchange values

• Political disruption and turmoil

• Intellectual property violations


The Idea of Risk ManagementThe best-laid plans of managers and companies run into

challenges when things do not go as plannedChallenges can arise from:

• Internal conditionsAbrupt shortage of money to finance expansions

• Unforeseen changes in the marketplace Uncertainty

oComes from changes in economic, social, and political trends

• RiskThe chance that a specific company will gain or

lose money on a particular investment activity


The Idea of Risk ManagementThe view of risk follows the notion that a basic

relationship exists between risk and returnPrudently managed risky markets promise

terrific growth opportunities and great profit potential for the confident MNE

Typically, the idea of risk conjures images of negative events such as devastating financial loss

oManaging risk as a hazard pushes managers to come up with methods to reduce the odds of a negative event

Globalization steadily pushes firms to see risk more as the price of better opportunities


Foreign Exchange RiskTo many, the most striking operating differences

between domestic and international business is the financial basis of exchange

Companies try to forecast exchange rate changes in the effort to reduce their possible costs

Companies try to limit the downside of currency fluctuation by:• Modeling currency trends

• Forecasting exchange rate movements

Several factors violate the law of supply and demand:• National governments


Foreign Exchange RiskThe irony of government intervention in the foreign

exchange market is that it is theoretically impossible for any form of intervention to permanently alter the value of a national currency

Government intervention tends to happen in hazardous styles that create extensive foreign exchange risk for international companies

Exchange rate changes can impact:

• Marketing decisions

• Production decisions

• Financial decisions


Foreign Exchange RiskCurrency values change frequentlyA change in the exchange rate can result in

three different exposures for a company• Translation exposure: created by the present

measurement of past activity

• Transaction exposure: exchange rate fluctuations materially change the expected income from a transaction that is denominated in foreign currency

• Economic exposure: materially influence a firm’s future earning power


Foreign Exchange RiskTypically, managers use a mix of the major tools of the

foreign exchange market:• Spot exchange rate: the rate at which a foreign exchange

market would willingly convert one currency into another currency

• Forward exchange rate: governs future deals

• Currency swap: refers to the simultaneous purchase and sale of a given amount of foreign exchange for different value dates

Management of economic exposure requires that a company carefully review its idea of risk and assemble the optimum mix of countries within which to build and operate its plants


Political Risk Political risk: the chance that political decisions, events, or

conditions in a particular nation will affect the business environment in ways that lead investors to lose some or all of the value of their investment or be forced to accept a lower-than-projected rate of return

There are several types of political risk:• Systemic political risk: generally, the political process within a

particular nation does not routinely subject foreign operations to discriminatory treatment

• Procedural political risk: can interfere with the process of transactions

• Distributive political risk: this form may be subtle

• Catastrophic political risk: includes random political developments that adversely affect the operations of companies and MNEs


Political RiskThe actions of host governments and local political

institutions and actors directly shape the success or failure of overseas operations

Methods of political risk management include:

• Active management: depends on identifying the indicators that best measure political riskPolitical risk management services

• Passive management: treat political risk as an unpredictable hazard of international business and seek ways to hedge their exposureOPICMultilateral development banks (MDBs)Private insurance


Intellectual Property Rights Intellectual property: the creative ideas, innovative expertise, and

intangible insight that gives an individual, company, or country a competitive advantage

Intellectual property rights (IPRs): refers to rights of the registered owner of the particular invention, literary or artistic work, symbol, name, image, or design

World Intellectual Property Organization (WIPO): a United Nations agency established in 1907, administers agreements

A country’s view of IPRs is influenced by:

• Level of economic development

• National cultural attitudes

• Social and economic institutions Many organizations are trying to set minimum standards for the

protection and enforcement of IPRs


Intellectual Property RightsThe basis and scope of disagreement among

nations on IPRs create fundamental gaps that will not be easily resolved

Companies are trying to devise ways to manage this risk:

• Employee relations

• Dealing with outside parties

• A tough reputation

prentice hall, 2002chapter 10 daniels 1 chapter ten risk management and asset protection

Documents

view of risk

idea of risk management

idea of political risk

prentice hall

opportunities sources

foreign exchange market

exchange rate movements

chapter objectives