Global financing and exchange rate mechanisms paper how it is used in global financing operations, and its importance in managing risks essay by alfredruiz , university, bachelor's , a+ , april 2008. The purpose of this paper is to analyze the exchange rate mechanism (euro currency markets), to describe how this mechanism is used in global financing operations, and to analyze its importance in managing risks the euro currency markets, specifically most of the countries in the european union (eu), have adopted the euro, a new currency that was introduced in europe on january 1, 1999, and introduced as physical coins and banknotes in 2002. According to dan west (1996), the following are few examples of countertrade: the first is the well known pepsi/ussr trade whereby pepsi-cola delivers syrup that is paid for with stolichnaya vodka and pepsi has the marketing rights of all stolichnaya vodka in the us. Historically, the finance functions in large us and european firms have focused on cost control, operating budgets, and internal auditing but as corporations go global, a world of finance opens up within them, presenting new opportunities and challenges for cfos.
To avoid risks in countertrade, the best advice is to retain professional, experienced help generally this is a reliable trading company familiar with either the country or the product your own company is best able to handle the risks associated with its own products or services. The use of an in-house trading company can help separate the two contracts the sales contract would be signed by the company responsible for selling your product and the countertrade contract by the trading subsidiary currency risks there are really two main currency risks.
All of these generally involve the exchange of goods or services to finance purchases, rather than using cash alone countertrade, in its various forms, represents 10-15% of world trade for doing business barter, is the oldest form of countertrade and involves the direct exchange of goods without any use of currencies offset. The following paper will analyze hard and soft currencies and explain how they are used in global financing operations lastly, this paper will describe the important for managing risks with hard and soft currencies. Liability or property and casualty insurance are often used to transfer the financial burdens of location risks to a third-party or a business insurance company human risks.
Currency risks there are really two main currency risks the first is non-convertibility, ie the currency will not be convertible when received or required as many countertrade transactions are designed to avoid this problem, this is less of a risk than might be expected. Countertrade and its variants can be beneficial when it offers a company a means to finance an export transaction in the absence of other means companies that do not wish to engage in countertrade activities can lose export opportunities to other domestic competitors that may be willing to enter such agreements. Countertrade 1 countertrade is exchanging of services or goods that are paid for, in whole or part, with other goods or services by two countries and sometimes both parties are happy with the goods they receive but other times one country will liquidate the received asset, ultimately receiving cash in the deal.
Countertrade is one of the best ways of managing risks this is because a company that is in need of products and services but is short of hard currency may still manage to acquire products and services through countertrade this eliminates the dangers that may face the company such as closure. When governments participate in trading they must guard their currency in order to protect their investments and transactions the following paper will analyze hard and soft currencies and explain how they are used in global financing operations lastly, this paper will describe the important for managing risks with hard and soft currencies soft currency is also known as weak currency.
The main risks that are associated with businesses engaging in international finance include foreign exchange risk and political risk these risks may sometimes make it difficult to maintain. Global financing and exchange rate mechanisms paper how it is used in global financing operations, and its importance in managing risks (2008, april 23. Countertrade and offset trading can also be exempt from tariff regimes, in a few circumstances countertrading is “a layer deep” in most companies and hence unavailable for individual investors to directly profit by it.
For example, instead of managing all currency exposures through the financial market, global firms can offset natural currency exposures through their worldwide operations let’s say a european subsidiary purchases local components and sells a finished product to the japanese market. Managing global finance and risk garry j schinasi, burkhard drees, and william lee the turbulence that swept through financial markets in the fall of 1998 was a wake-up call.
Varied,and have more global effectthese risks relate not only to reporting and compliancethey also include strategic and operations risksincreased corporate strategic alliances and business partnerships also create growing risk interdependencies scope of financial risksthey want concrete. The attractiveness of a country as a potential market for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country (t/f) true the choice of which markets to enter should be driven by an assessment of relative long-run growth and profit potential (t/f.