Conducting everyday business operations for any company can be a challenging adventure. Every business starts out with practically nothing but an owner with imaginings of a prosperous business. One of the challenges that these business and owners may face, is the opportunity to conduct business in other countries with dissimilar currencies. These challenges create many financial risks of conducting business internationally. Since the two different countries have unalike types of currency then the exchange between the two different currencies for one company can cause problems.
Recession and financial conflict have in recent years provided an uncomfortable reminder of the financial risk of international business. International corporations, financial institutions, and international investors have experienced that the profitability of their primary business has been harmfully affected by major fluctuations in exchange rates, stock market prices and in the credit rating of counter parties. Additionally, the business risk inbuilt in the primary business of an international corporation, which is dealt with by long term strategic planning and business cycle monitoring, the international corporation has to deal with financial risks.
Some of them are listed below (Bostas, 2005).
1. Interest rate risk - The risk of increased funding costs due to high rates of interest, which may dominate for longer or shorter periods.
2. Liquidity risk - The risk of running short of cash when liquidity in the banking system is scarce and expensive.
3. Credit risk. -The risk of losses due to the inability to pay by counter parties,
The internationalization of business has made the management of financial risk more important. It is a natural consequence of conducting international business that a corporation is exposed to one or more of the above financial risks.
The finance department must be able to record all group companies' operational, investment and financial cash flows, the...