This work is divided in four main parts. In the first part is focused in the currency risk regarding to the multinational companies and local companies. The second part was required an examination about the international transaction of Nelson plc Company, which is medium sized importer and exports based in Singapore. In the third part the attention was given to the Country risk. About the country risky three countries (United Kingdom, South Africa and Nigeria) with low risky, medium, and high were analysed. The Critical analysis and conclusions are included on the fourth.
Part1 - Currency risk
Hill (1998) reports that, risk as well as uncertainty both refer to situations where the probable outcomes of present investment decision are plural. Nevertheless, risk implies that the scope and probabilities of these outcomes are known in advance. Levi (1990) argued that, the mainly evident supplementary risk of global versus domestic business arises from uncertain in relation to the expectations of exchange rates. Unpredicted changes in exchange rates can contain vital impacts on sales, prices and income of both exporters and importers depends on whether changes in exchanges rates really create a firm's goods cheaper or further expensive to buyers. According to FINRA (2010) as with most risks, currency risk can be managed by allocating just a restricted part of your portfolio to worldwide investments and diversifying this fraction transversely diverse countries and regions.
Buckley (2000) added the term 'exposure' used in the context of foreign exchange means that a firm has assets, liabilities, profits or expected future cash flows streams such that the home currency value of assets, liabilities, profits or the present value in home currency terms of expected future cash flows changes as exchange rates change. In this sense, as risk arises since currency movements may modify domestic currency value, and the Firm are exposed to foreign exchange risk. The Foreign exchange exposure is typically classified according to whether it falls into one or more of the next categories: (1) Transaction exposure, (2) Translation exposure, (3) Economic exposure .
The international companies
All the Firms which operate in an international marketplace are subject of these three types of risk.
A transaction exposure -is regarding with the exchange risk implicated in sending funds over a currency boundary. It occurs when cash, denominated in a foreign currency, is contracted to be compensated or received at some future time. Hence, unexpected changes in exchange rates can impose extensive losses and make available unexpected gains unless action is taken to manipulate the risk. Pike and Neale (2006)
Managing transaction risks - Arnold (2005) suggested strategies to deal with transaction risk. Assume a UK company exports £1m of goods to a Canadian firm when the spot rate of exchange is C$2.20/£. The Canadian firm is given three months to pay, and obviously the spot rate in three months is indefinite at the time of the delivery of goods. What can the UK firm do?
Invoice the client in the home currency - One simple technique to avoid exchange-rate risk is to insist that all foreign clientele pay in your currency and your firm pays for all imports in your home currency. In the case of this example the Canadian importer will be required to send £1m in three months. Nonetheless, the exchange-rate risk has not left; it has merely been passed on to the customer. This strategy has obvious problems, your customer may detest it, the marketability of your goods is reduced and your buyer looks somewhere else for supplies (ibid).
Do nothing - Below this rule the UK firm invoices the Canadian firm for C$2.2m, waits three months and afterwards exchanges into sterling at whatever spot rate is accessible after that, exchange-rate increase or decrease. Many firms adopt this policy and take can win or loss Arnold (2005).
Forward and futures contracts - is another way to diminish exchange rate movements for an global exposure are meant to be used for a precise stage of time to hedge known cash inflows or outflows against adverse fluctuations in the exchange rate Worzala E (1995). Forward contracts, is usually written for less than a year, even though newly longer-term contracts for five or ten years have become existing in major currencies such as sterling, yen, or Deutschmark. However, these contracts are available only to large multinational companies (Madura, 1992 cited by Worzala 1995).
Futures contracts, on the other hand, are sold on an organized exchange. Contract sizes are set for each currency (much smaller than those of forward contracts) so an investor may be not capable to precisely match the cash flow to be hedged and may have to acquire extra currency. In addition contracts have specified final dates and the ending date will not essentially correspond with the time when the investor is to collect or pay out the foreign currency, so that future contracts hardly supply a total hedge.
Forward and future contracts work in a parallel - the investor locks in an exchange rate and, consequently the comeback, so the risk intensity of the international investment is like to the risk connected with the local market return, unadjusted for currency fluctuations. To hedge the full investment and preserve the investment portfolio in real estate beyond the deliverance date of the contract, an investor closes out the position held by the forward contract by using the spot exchange rate market right before the forward contract is to end. That is, the old contract is settled with the current spot rate and a new forward position is produced for the next phase ( Madura and Reiff, 1985 cited by Worzala 1995).
For instance, an American investor holds a million sterling investments in London and desires to hedge its amount against a potential appreciation of pound. The investor might purchase a three-month forward contract ant later sell sterling for dollars at the forward rate of $1.50/£.To keep on to hedge the investment afterwards, the investor should vend a million pounds sterling at $1.50/£ to complete the conditions of the agreement at termination and then start a new contract. Since the building will not actually be sold, the investor must buy sterling to settle the first contract. If the current spot rate is at $1.60/£, the investor must pay $1.6 million for £1 million and get in return, at settlement, only $1.5 million. In the formula above is illustrated the relationship:
Where: (Sh ) is settlement win or loss, (F0) is the forward rate, (S1) is the spot price at the end of the time before the next forward contract. So, if S1 = $1.60, the investor has a loss on settlement of: (1.50 - 1.60)/1.50 = −0.067 per cent. If, on the other hand, S1 = $1.45, then the investor has a gain on settlement of (1.50 - 1.45)/1.50 = +0.033 per cent.
Netting-out" international portfolio investments - In all probability buyers of global real estate will be component of great portfolios which already include futher international investments. An different approach for large portfolio managers can be to consider all of the diverse international investments in the portfolio (stocks, bonds and real estate) and to net-out exposures in any country. Following the lines of recent portfolio theory, it may also be suitable to net-out investments in countries whose exchange rate fluctuations also are extremely interrelated. Subsequently, netting-out the currency exposures, the hedging for the whole portfolio could then be based on the currency specialists′ knowledge and expertise on how the foreign currency markets are fluctuating in relative to the domestic currency of the portfolio at a given point in time Mahama and Ming (2009).
Money market hedge - involves borrowing in the money markets. A Swiss company importing Japanese cars for payment in yen in three months could borrow in Swiss francs now and convert the funds at the spot rate into yen. This money is deposited to earn interest, with the result that after three months the principal plus interest equals the invoice amount Arnold (2005).
Back to back loans and currency swaps - Worzala E (1995) another degree of exchange rate risk deals with unexpected changes in real exchange rates happening over a longer term. These changes are joined to the basic economic circumstances of a country. This level of investigation is decisive for supporting investment value over the long term, but hedging with any exactitude is not possible. As a result, an international real estate investor may wish to take into account a back-to-back loan or the currency swap. These instruments determine associations with foreign investors so that currency is never in fact exchanged.
A back-to-back or parallel credit involves two firms in diverse countries arranging to borrow each other′s money for a particular era of time. At an agreed terminal time the two firms return the borrowed currencies. In the case of a real estate investment, a US Firm wishing to acquire an office building in England locates, a UK firm wanting to invest funds in the United States. To manage the exchange risk, the US Firm borrows dollars for the UK Firm and the UK Firm borrows sterling for the US Firm. The two loans are of equivalent value at the existing spot rate, and both are held for a particular period of time. Interest are paid in the home currency of the loan (more than possible from income generated from the investment), and at maturity the loans are repaid in the local currency (more than likely from the proceeds of the sale of each building)(ibidi).
Translation exposure - is relating with the impact on cash flows into the parent company's currency, translation exposure affects Balance sheet values, and to a less important extent, since assets normally exceed profits or cash flow in enormity, the profit and Loss Account. Examples of items that a treasurer might consider to be subject to translation exposure if denominated in foreign currency are debts, loans, inventory, shares in foreign companies land and buildings, plant and equipment, as well as the subsidiary's retained profits. Pike and Neale (2006)
Managing Translation Exposure - The effect of translation risk on the balance sheet can be lessened by matching the currency of assets and liabilities. For example, a company has decided to go ahead with a US$190m project in USA. One way of financing this is to borrow£100m and exchange this for dollars ate the current exchange rate of US$1.9/£, thus at the beginning of the year the additional entries into the consolidated accounts. One constraint of this solution is that some government insist that a proportion of assets acquired within their countries is financed by the parent firm. Another constraint is that the financial markets in some countries are insufficiently developed to permit large-scale borrowing.
Economic exposure- is concerned with the present value of future operating cash flows to be generated by a company's activities and how this present value, expressed in parent currency, changes following exchange rate movement. The concept of economic exposure is most frequently applied to a company's expected future operating cash flows (unhedged) from sales in foreign currency and from foreign operations Buckley (2000). The value of an overseas operation can be expressed as the present value of expected future operating cash floes which are incremental to that overseas activity discounted at the appropriate discount rate. Expressing this present value in terms of the (ibid)
Managing economic risk - The main method of insulating the firm from economic risk is to position the company in such a way as to maintain maximum flexibility-to be able to react to changes in forex rates which may be causing damage to the firm. Firms which are internationally diversified may have a greater degree of flexibility than those based in one or two markets. The principle of contingency planning to permit quick reactions to forex changes applies to many areas of marketing and production strategies. Despite the cost of creating an adaptable organisation, rather than a dedicated fixed one, the option to switch may be worth far more in an uncertain world. Arnold (2005)
Home Companies
Fluctuations in currency prices are one of the sources of risk that may influence the financial results of corporations or individuals having credits/liabilities in foreign currencies. Assuming that the company has assets or business operations across national borders, investments abroad, and has credit or loans in a foreign currency .It follows that it is exposed to currency risk, as long as the management does not decides to hedge the positions. (www.xtb.com/strona.php). From the currencies risks mentioned above the economic and transaction also impact on the local companies.
Economic exposure - Arnold (2005), informs that the economic exposure described above is equally well be applied to a firm's home territory operations and the extent to which the present value of those operations alters resultant upon changed exchange rates. Pike and Neale (2006) reports that if the exchange rate between sterling and foreign currencies shifts over time, then the value of the stream of foreign cash flows in sterling will alter through time, affecting the local companies which buys goods and services from abroad and sells its goods or services into foreign markets. He believes that the management of economic exposure involves looking at long-term movements in exchange rates and attempting to hedge long-term exchange risk by shifting out of currencies that are moving to the detriment of the long-term profitability of the company. It is worth noting that many economic exposures are driven by political factors, e.g. changes in overseas governments resulting in different economic policies such as taxation.
Part 2 - Nelson plc -medium sized company based in Singapore
Sing $/US$
Aus$/US$
USA
Spot rate
1.8126
2.0367
30 day forward
1.8101
2.0350
Bank base rates
2.25%
3.75%
4.25%
Inflation rates
1%
3.25%
Question 1 - The Forward US$ rate on 31st day
Premium
Spot rate
Forward rate
Sing $/US$
-0.0025
1.8126
1.8101
Source: Pike and Neale (2006),
Pike and Neale (2006), argues that from spot to forward rates can conclude if the forward rates will be in discount or premium. He reports that, if the differences between spot will be negative the forward rates will be in premium circumstances, if positive it will be in discount situation. According to this theory the forward rate will be on premium after 30 days. Buckley (2000) extended that if a foreign currency stands at premium in the forward market, it shows that the currency is stronger than the home currency in that forward market.
Question 2 - Forward rate
The forward foreign exchange rate at contract origination, Ft, can be calculated with the following general formula:
Ft = S0 * [(1 + R2) / (1 + R1)]
Where (Ft) = forward foreign exchange rate at time period T, (S) = today's spot foreign exchange rate foreign currency per unit of domestic currency (R2)) = foreign interest rate for time period T, (R1 )= domestic interest rate for time period T . This calculator uses simple interest and 360/90 day count convention (Shapiro 1999).
Sing$
Spot rate 1dollar
1.8126
360/90=4
(Râ‚‚) -Foreign interest rates {1+(0.0425/4)}
1.010625
(Râ‚) -Domestic interest rates {1+(0.0225/4)}
1.005625
Forward rate after 90 days
1.821612
The amount after 90days (USD 2.000.000)
Sing$ 3.643.224
Source: Adapted from Shapiro (1999), based on interest rate parity theory
Base on spot rate 1 dollar is equal to 1.8126 Singapore. With the information available the forward rate implied in 90 days 1 dollar will be equal to 1.821612. The Singapore company will get the amount of Sing$ 3.643.224 mil.
Question 3 - Spot Market/Forward Market
Sing$/US$
Aus$/US$
Spot rate
1.8126
2.0367
With 1.000 Sing $, we can buy (Spot rate)
551,69 USD
1.123,63 Aus$
30 day forward
1.8101
2.0350
With a 1.000 Sing $/US$, we buy (forward rate)
552,46 USD
1.124,25 Aus$
From the table above we can conclude that the forward rate is the better option. If we have Sing$ 1.000 we can buy now on spot rate only Aus$ 1.123,63 however 30days after with the same Sing$ 1.000 we can buy Aus$ 1.124,25. Definitely we can save money waiting for the forward rate rather than the spot exchange rate.
Question 4 - Buy Aus$ now on spot market and deposit for 30 days
Sing$/US$
Aus$/US$
Spot rate
1.8126
2.0367
With 1.000 Sing $, we can buy (Spot rate)
551,69 USD
1.123,63 Aus$
Make a 30 days deposit (3.75%)
1.127,08 Aus$
30 day forward
1.8101
2.0350
With a 1.000 Sing $, we buy (30 days forward rate)
552,46 USD
1.124,25 Aus$
The table above show that the better option is to buy now on spot rate, make a deposit. So the forward rate in this case is not the better option. With same sing$ 1.000 we can buy Aus$1.123,63 put in a deposit for 30days the company will get the total amount of Aus$1.127,08, instead of just 1.124,25 based on 30 days forward rate.
Question 4 - Buy Aus$ now on spot market and deposit for 30 days (Cross rate).
With cross rate Sing$/Aus$, we have the same answer, the better option still buying on spot rate and make 30 days deposit.
Sing $/US$
Aus$/US$
Sing$/Aus$
Spot rate
1.8126
2.0367
0.8899
With 1.000 Sing $ we can buy (Spot rate)
Aus$1.123,72
Make a 30 days deposit (3.75%)
Aus$1.127,17
30 forward rate
1.8101
2.0350
0.8895
With a 1.000 Sing$ we can buy (forward rate)
Aus$1.124,23
Question 5 -
In order to answer this question we can assume that the Singapore Company have to pay the Australian Company Aus$ 1.123.712,77 in one year time.
First option - Borrow Sing$ today and pay off our Australian$ borrowings
Borrow Sing $ 1.000.000
Sing$ 1.000.000
Interest after one year
Sing$ 225.000
Convert Sing$ to Aus$ (Cross spot rate)
Aus$ 1.123.712,77
Total expenditure Sing$
Sing$ 1.225.000
Second option - The Singapore Company will not borrow any Sing$. The Company decided to pay the Australian borrowings after one year based on expected one year forward rate.
Sing$/Aus$
Spot rate (cross rate)
0.8899
360/360=1
(Râ‚‚) -Foreign interest rates {1+0.0375}
1.0375
(Râ‚) -Domestic interest rates {1+0.0225}
1.0225
One year exchange Forward rate
0.902955
To buy the same 1.123.712,77 Aus$ we just need
Sing$1.014.662,06
Total Expenditure Sing$
Sing$1.014.662,06
Using the same formula (Ft = S0 * [(1 + R2) / (1 + R1)]) to calculate the one year forward rate can conclude that is not a better option to borrow Sing$ to pay the Australian borrowing. As is illustrated in the first option, if we borrow the Sing$ today after one year the total expenditure will be Sing$ 1.225.000. In the second option the Singapore Company will just spend just Sing$ 1.014.662,06, based on expected one year exchange forward rate.
Question 6 -
Borrow US$ and pay off our Australian borrowing, to pay the same amount to the Australian (1.123.712, 77)
To get the Aus$ 1.123.712,77 we need to borrow US$ (spot rate)
US$ 551.732,10
Interest after one year (4, 25%)
US$ 23.448,61
Total expenditure in US$
US$ 575.180,71
One year forward date Sing$/US$
1.848054
Total expenditure in Sing$ (one year forward exchange rate)
1.062.965,01
In the previous question we assumed that the Singapore Company needs to pay the Australian borrowing the amount of Aus$1.123.712,77, and we concluded in that question that the better option is to pay the Australian borrowing, after one year based on one year forward rate. In the question6, the Company should not follow the banker opinions. Assuming that the company seeks to pay the same amount of Aus$ 1.123.712,77 to the Australian borrowing by take a loan of US$ 551.732,10 after one year the total expenditure will be US$ 575.180,71 the company will spend just in total the amount of Sing$ 1.062.965,01. In the table below is illustrated the resume of the three options above. Cleary, we can observe that the Singapore Company will spend less in the second option.
Resume of question 5 and 6
Options
Amount spent in Sing$
First option- Borrow Sing$ today and pay off Australian borrowings
1.225.000
Second option- Pay Australian borrowing based on one year forward rate
1.014.662,06
Third option -Borrow US$ today and pay the Australian borrowings
1.062.965,01
Part 3 - Factors which contribute to country risk
In accessing intercontinental capital markets would consequently, supplement the countries' efforts both to incorporate into the global economy and to promote the development of domestic financial markets. In spite of this in accessing these markets countries necessitate to be conscious that they obtain on certain new risks, as well as foreign exchange risks that would have to be cautiously managed over time (Hausler 2003).
Shapiro (1999), argued the country risk from a bank's standpoint, the opportunity that borrowers in a country will be powerless to service or repay their amount overdue to foreign lenders in a appropriate time. The essence of country risk investigation at commercial banks, hence, is an assessment of factors that involve the like hood that a country will be capable to create adequate money to pay back foreign debts as theses debts come due.
Theses aspects are both economic and political. The economic factors regularly pointed to are the country's reserve base and its external financial situation. Most significant however, are the characteristic and effectiveness of a country's economic and financial administration rule. The evidence from those countries that suffered through the international debt crisis is that all too often the underlying causes of country risk are home grown, with massive corruption, overstuffed bureaucracies, and government interference in the economy (ibid).
Political aspects that underlie country risk comprise the degree of political stability of a country and the extent to which a foreign entity, such as the United States, is willing to implicitly stand behind the country's exterior obligations. Lending to a private-sector borrower also exposes a bank to commercial risks, in addition to country risk. Because theses commercial risks are commonly similar to those encountered in home lending they are not treated independently (Shapiro 1999).
A.M Best (2009) defines country risk, as the risk that country-specific factors can unfavourably influence an insurer's capacity to meet its financial obligations, and the risk could be separated into three major categories: economic risk, political risk and financial system risk. The financial system risk is further divided into two sections: insurance risk and non-insurance financial system risk. According A.M. Best (2009) country risk are placed into of fives tiers, raging from countries with calm environment with least sum of risk to countries that pose the most risk and, consequently the greatest challenge to an insurer's financial stability, strength and performance (Tier1 to Tier5), as is showing in table 3.1
Table 3.1 - Source A.M. Best (2009)
According to Buckley (2000) the economic risk is concerning to the state of the domestic economy, government finances and international transactions, as well as prospects for growth and stability. The political risk takes various forms, from changes in tax regulations to exchange control, from stipulations about local production to expropriation, from commercial discrimination against foreign-controlled business to restrictions on access to local borrowings. Haner 1979 (cited by Buckley 2000) approach's to measure the political risk rates on a scale from 0 to 7 numbers of factors which causes internal political stress. These include:
Fractionalization of political spectrum and the power of resulting factions
Fractionalization by language, ethnic or religious groups and the power of resulting factors
Restrictive measure required to retain power
Xenophobia, nationalism, inclination to compromise
Social conditions, including extremes in population density and the distribution of wealth
Organization and strength of radical left government
To these factors Haner, added ratings arising from external factors such as, dependence on or importance to a hostile major power and negative influence of regional political forces, possibilities of border wars and disruptions arising from such sources of conflict. Finally computed and aggregated with societal conflict and political instability. Countries are then rated as to minimal risk (0 to 19), acceptable risk (20 to 34), high risk( 35 to 44) and prohibitive risk( 45)
The Financial system risk (non-insurance) is the risk that financial volatility may erupt due to inadequate reporting standards, weak banking systems are asset market or poor regulatory structure, whilst insurance risk is regarding to the government commitment to an open and well-regulated insurance industry, adequacy of supervisory authority and its supporting infrastructure and insurer accountability A.M. Best (2009). All the risk's components of country risk are illustrated in the table 3.2
Table 3.2 - source: A.M. Best (2009)
United Kingdom - Low Country Risk
The United Kingdom is a country with a very low level of risk across all three categories. Despite its excellent risk profile, the UK has been hit particularly hard by the global financial turmoil. One of the reasons for the UK's particular vulnerability is its sizeable financial sector, which has been impacted very negatively by current conditions. The Government has taken steps to counteract the effects of current financial crisis. Theses steps include partial nationalization of the banking system and implementing several stimulus packages. The UK is widely seen as major centre for international insurance and reinsurance and is home to the London Market, a wholesale market that writes risk around the world. Lloyd's of London accounts for over half of the business on the London Market A.M. Best (2009).
Nigeria - High Country Risk
Nigeria is high economic risk and very high political and financial system risk. The Financial Nigeria reports (2010) described the principals' issues for 2010 in the table 3.3. The lack of transparency/corruption is highest with (177) points as the severest of the risks that will define economic performance in Nigeria in 2010. The next weightiest risk is weak economic Growth Policy (166) although it was the most frequently mentioned. With the perception that the level of corruption in the country is rising, it is believed that more Nigerian policy makers and corporate leaders are losing the incentive to develop and rigorously implement good policies for their institutions. In the middle of the table we see a higher convergence of operational and some political risk factors, suggesting that political risk are more specially, electoral risk factors are seen less as capable of disrupting business as usual in Nigeria in 2010. As a matter of fact Electoral/Campaign Violence ranks in the 32 position.
Risks
Frequency
Weight
Lack of Transparency/Corruption
54
177
Weak Economic Growth Policy
63
166
Currency Exchange Rate Volatility
46
147
Budget Implementation/Policy Failure
47
115
Investors Apathy
36
88
Failure to Attract or Retain Top Talent
35
84
Regulatory/Legislative Changes
30
81
Higher Input Cost
32
77
Poor Corporate Governance
29
76
Cash Flow/Liquidity/Credit Crunch
33
75
Loan Losses
24
71
Government Policy on Energy Cost
24
69
Inadequate Compliance/Enforcement of Rules
30
67
External Shock from Lower Oil Price
27
66
Fraud & Money Laundering
18
62
Vandalism/Sabotage
23
61
Weak Balance Sheets
22
59
Civil Disturbances/Labour Unrest
24
50
Armed Robbery/Kidnapping/Accident
18
47
Distribution or Supply Chain Failure
23
45
Change of President
16
44
Poor quality Public Work/Fake Products
19
44
Imported Inflation
20
43
Competition with Other African Frontier Markets
19
39
Poor Employee Job Performance
20
38
Damage to Reputation
17
37
Weak International Engagement
19
36
Inappropriate Tariff
16
36
Inadequate Disclosure
13
35
Epidemic/Environmental Pollution
12
34
Job Insecurity
12
29
Electoral/Campaign Violence
12
27
Employee Dishonesty/Financial Theft
11
25
Weather/Natural Disaster/Climate Change
14
22
Domestic Debt Financing
7
14
Table 3.3: Source Financial Nigeria (2010)
In addition, the production of which accounts for approximately two thirds of gross domestic product (GDP) and the majority of government revenues, foreign investors are attracted to Nigeria's petroleum industry, and there is a bullish attitude about Nigeria's economy relative to much of the rest of sub-saharan Africa. External debt fell sharply during the global oil boom. Nigeria is the first African nation to settle its debts with Paris Club group of creditors. Though the global economic crisis has weighed on Nigerian fiscal and trade balances, growth will continue through 2009 A.M. Best Methodology (2009).
Nigeria's potential is unrealized as corruption, inadequate physical and bureaucratic infrastructures, an inefficient legal system and social instability interfere with commercial and private investment. The Niger Delta region is unstable with poor environmental conditions and waves of violence. This poses a threat to social and political stability but also to the economy as this often results in disruptions in oil production. The President Umaru Yar-Adua is aggressive in addressing corruption, particularly in business. Financial Nigeria (2010)
South Africa Country Risk (Tier 3)
The country is an emerging market with moderate economic and political risk and promising economic prospects. Though growth will contract in 2009 in the wake of the global financial crisis, economic growth will return in 2010. South Africa Economic Risk - The country has a largely industrialized economy with a larges services sector. Gross domestic product (GDP) per capita is high relative to other African nations (USD 5693) but there is a great deal of income disparity as half the country lives in poverty. The inflation was high in 2008 at 11.5% but price increases slowed considerably with the global economic slow down A.M. Best Methodology (2009).
Political Risk - Though regional stability is low South Africa is a stronghold of political and societal progress. There has been a political shift in South Africa due to the forced exit of the former president in the wake of corruption scandal. Aggressive fiscal spending is combating economic conditions, and the South Africa central bank has cut interest rates aggressively. Both the high crime rate in South Africa and the AIDS epidemic pose serious societal problems and have interfered with prospects for growth and investment. Financial System Risk: The basic regulatory and legal framework is established in South Africa and, like many emerging market countries, and the government is working toward meeting to global best practices (ibid).
Conclusions and critical analysis
To conclude, an investigation of the international market is an important tools in order the companies can mitigate the currency risk. All the company are exposure at the current risk or other type of risk, therefore the multinational companies are more exposure than local companies. By the classes and an additional investigation we have learnt how to reduce the risk, however, there still have some risk.
In the case of the Nelson plc company cited above Experts suggests that, it is always good to borrow in the home currency than a foreign currency. In this case it is better to borrow in Sing$ if it is for the parent company, but if the borrowing is for the subsidiary, then we need to borrow in Aus$ as the subsidiary is base there. This will prevent exposing company to excessive foreign currency risk. In this particular case the company does not have a branch or a subsidiary at USA, therefore borrowing in US$ will mean borrowing a foreign currency and this is against the expert and academic opinion as we could be expose to currency risk. The borrowing in Australia was purely for the subsidiary in Australia therefore it is not a good idea to pay off the Australian loan and borrow in the USA. Apart from the foreign exchange exposure it is expensive to borrow in USA than in Australia.
Another interesting topic was about country risk. Although the UK is a country we a very low risk some risk can arise, as a example we can consider the recent volcanic in Glasgow, the airspace was closed, as a result of that the air companies lost lots of money, according to the specialist this situation happens every 100 years. This can have within 100 times another impact on the country structure, and then canwill measure as a country risk. The South Africa country risk are very much influenced by the historical situation in the past, while the Nigeria country risk is based on the high level of corruption in that country.
