Question

Briefly discuss two risks impacting on global economic developments.Explain how these risks can affect the performance of a firm that is engaged in international trade. What can a firm do to protect itself from these risks?

Answer 1

hohen an organization decicles to engage in international financing activities, it bakos on additional risk along with the oppor- tunity. The main risks that are asson ciated with businesses engaging in inter- noctional finance include foreign exchange tisk & politi col risk. These isks may sometimes make it difficult to maintain constant & reliable revenue. 1) Foreign exchange risk: . Forrigs each ange risk occurs when the value of an investment fluctuates are to changes in a curre- ney's exchange rate thisen a domestic currency appreciates againsb a foreign currency profit or totums earned in the foreign country will deckase after being exchanged back to the domestic curtney.

2) Political Risk: 1 Geopolitical risk, also known as polítical risk transpires when a country's government unexpectedly changes it's policy which now nega- firely affect the foreign company. These policy changes can include such things as tradle barriers which serre to limit or prevent international trade, some governments will request additional funds or tariffs în exchange for the right to export items into their country 1. As a firm one can hedge forign exchange risk with options, while political risk can be mitigated with political insurance.