Country Risk AnalysisStar Jeans Company, in its quest for international exposure, must perform an initial country risk analysis for Brazil. The country risk analysis will examine the economic, translation, and transaction exposure along with the political, socio-economic, and environmental risks pertinent to Star Jeans Company expanding into Brazil. Star Jeans Company will also use various analysis techniques to mitigate the risks identified in venturing into business in Brazil. The results of the analysis will be interpreted using qualitative and quantitative techniques that will allow Star Jeans Company to prepare to make a direct foreign investment decision.
Economic ExposureThe main concern with economic exposure is that it affects the value of the company's cash flows through the fluctuation of foreign exchange rates. Star Jeans Company is looking into expanding to Brazil; therefore, it must pay close attention to the exchange rate fluctuations of the U. S. dollar (USD) and the Brazilian real (BRL).
Managers at Star Jeans Company will need to hedge economic exposure if they decide to expand into Brazil. As stated in Investopedia, many international companies are significantly uncovered to economic exposure. (2007). Star Jeans Company's cash flows are at risk of being affected by exchange rate fluctuations, in this case fluctuations of the BRL. Star Jeans Company's strategy must include the consideration of selling future foreign currency, equal to the company's current net revenues in foreign currency.
One way of achieving this is by participating in the foreign exchange market (Forex or FX) where currencies are traded. "The overall forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion [USD] per day and includes all of the currencies in the world" (Investopedia, 2007, 1). In addition, forex is a seamless 24-hour market as the locations in Sydney, Japan,