Country Risk Analysis: India and Brazil

Essay by DANIMAL69University, Bachelor'sA, April 2007

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IntroductionWhen making the decision to invest in a foreign country there are several measures that need to be taken and perhaps the most important measure is the risk analysis. By conducting a risk analysis the investor is able to predict future cash flows and earning potentials as well as make smart investment decisions based on the country's current state. In this case the US based manufacturing firm is trying to decide whether to build subsidiaries in India or Brazil. In order to help make the decision several areas of the country need to be evaluated. Economic, translation, and transaction exposure need to be assessed because these types of exposure can destroy an investment if they are not taken into consideration. Being aware of the economy of the country as well as the fluctuations in exchange rates are detrimental in making a sound investment decision. Political, socio-economic, and environmental issues also need to be evaluated to ensure that a subsidiary will be a fit in the country.

Economic ExposureA company's present value of future cash flows is subject to economic exposure and exchange rates. Transactions that contribute to transaction exposure are transactions that can cause economic exposure. This is due to the fact that each of these transactions is subject to ups and downs in exchange rates (Madura, 2006). Economic exposure can also occur even when there is not transaction exposure. India and Brazil are subject to transaction exposure, which in turn makes the countries subject to economic exposure in various ways. First, the US based manufacturing firm will be selling and purchasing items in India and Brazil, which not only exposes them to transaction exposure but also economic exposure. Also, the earnings from India and Brazil's manufacturing sites are also subject to economic exposure. Finally, a fluctuation in exchange rates...