Types of risk and various Risk managemnt.pptx

Types of risk and various Risk managemnt techniques
The major international risks for businesses include foreign exchange and political risks. Foreign exchange risk is the risk of currency value fluctuations, usually related to an appreciation of the domestic currency relative to a foreign currency

Foreign Exchange Risk
Foreign exchange risk occurs when the value of an investment fluctuates due to changes in a currency's exchange rate. Foreign exchange risk is also known as FX risk, currency risk, and exchange-rate risk. When a domestic currency appreciates against a foreign currency, profit or returns earned in the foreign country will decrease after being exchanged back to the domestic currency. Due to the somewhat volatile nature of the exchange rate, it can be quite difficult to protect against this kind of risk, which can harm sales and revenues.


For example, assume a U.S. car company receives a majority of its business in Japan. If the Japanese yen depreciates against the U.S. dollar, any yen-denominated profits the company receives from its Japanese operations will yield fewer U.S. dollars compared to before the yen's depreciation. Foreign exchange risk typically affects businesses that export and/or import their products, services, and supplies.

Political Risk
Geopolitical risk, also known as political risk, transpires when a country's government unexpectedly changes its policies, which now negatively affects the foreign company. These policy changes can include such things as trade barriers, which serve to limit or prevent international trade.

Some governments will request additional funds or tariffs in exchange for the right to export items into their country. Tariffs and quotas are used to protect domestic producers from foreign competition. This also can have a huge effect on the profits of an organization because it either cuts revenues from the result of a tax on exports or restricts the amount of revenues that can be earned.


Countries have implemented free-trade agreements, such as the North American Free Trade Agreement (NAFTA) and other similar measures, in an effort to reduce the number of trade barriers. However, not all of these measures are successful, and ongoing trade wars can disrupt an international company's business and market efficiency. Thus, the everyday differences in the laws of foreign countries continue to influence the profits and overall success of a company doing business transactions abroad.

Protection for International Businesses
In general, organizations engaging in international finance activities can experience much greater uncertainty in their revenues. An unsteady and unpredictable stream of revenue can make it hard to operate a business effectively. Despite these negative exposures, international business can open up opportunities for reduced resource costs and larger lucrative markets. There are also ways in which a company can overcome some of these risk exposures.

Geopolitical risk, is also

1. Exchange rate management of India 1) PAR VALUE - During the period 1947 till 1971, India followed the par value system of the exchange rate whereby the rupee’s external par value was fixed at 4.15 grains of fine gold. The RBI maintained the par value of the rupee within the permitted margin of ±1% using pound sterling as the intervention currency. The devaluation of the rupee in September 1949 and June 1966 in terms of gold resulted in the reduction of the par value of rupee in terms of gold to 2.88 and 1.83 grains of fine gold, respectively. Since 1966, the exchange rate of the rupee remained constant till 1971

2. (2)DEVALUATION OF RUPPE - Deliberately decrease in value of currency of our Country in comparison to another country. Devaluation of India Re. taken place of times from 1947. In 1947 the value of I Re. = I USD but Value of 1 USD =75 Rs Country goes for devaluation of its very to correct in BOP. County is experiencing adverse BOP Situation then it has to devalue its currency. So that it exports gets Cheaper of imports became Costlier .

3. Management of exchange risk It is necessary for all institutions having exposure in foreign currencies to manage foreign exchange risk. It involves prudently managing foreign currency positions in order to control the impact of changes in exchange rates on the financial position of the institution .

4. Management of exchange risk It is necessary for all institutions having exposure in foreign currencies to manage foreign exchange risk It involves prudently managing foreign currency positions in order to control the impact of changes in exchange rates on the financial position of the institution .

5. steps : followed by foreign risk management 1. Defining and Measuring Exposure 2. Creating a Reporting Syste m 3. Formulating Hedging Strategies
a) Operational Hedging Strategies b) Hedging by Lead and Lag 4. Independent Inspections/Audits

6. FOREIGN EXCHANGE MANAGEMENT ACT, 1999 Replaced FERA- Foreign Exchange Regulation Act 1973 Exchange control was introduced as a temporary measure in 1939. Placed on statutory basis in 1947 (FERA 1947) FERA 1947 replaced by FERA 1973. FERA 1973 replaced by FEMA 1999. FEMA, 1999 came into effect from 01.06.2000.

7. Objectives of FEMA 1999 FEMA, 1999 came into effect from 01.06.2000. There are two main objectives of FEMA 2000 To facilitate external trade and payments. To promote the orderly development and maintenance of foreign exchange market in India. There are 7 chapters divided into 49 sections in FEMA .

8. Exchange Risk Foreign exchange  risk refers to the losses that an international financial transaction may incur due to currency fluctuations. It is als o known as C urrency R isk , FX R isk and E xchange - R ate R isk . It describes the possibility that an investment’s value may decrease due to changes in the relative value of the involved currencies. 

9. Types of Foreign Exchange Risk Types of Foreign Exchange Risk Economic Risk Interest Rate Risk Translation Risk Transaction Risk Political Risk

10. 1. Transaction Risk Transaction R isk : is the risk that a company faces when it's buying or selling a product from a company located in another country. Transaction exposure or risk exists when the future cash transactions of a firm are affected by exchange rate fluctuations.

11. Example of Transaction Risk/Exposure

12. 3.Political Risk Political risk is the risk which is unanticipated governmental action or politically motivated event that could adversely affect the long run profitability or value of firm. As government policies change MNCs must be willing and able to adjust their strategies to accommodate the actual requirement.

13. 4. ECONOMIC RISK Economic risk is referred to as the risk exposure of an investment made in a foreign country due to changes in the business conditions or adverse effect of  macroeconomic factors  like government policies or collapse of the current government and significant swing in the exchange rates.  

14. 5.Interest rate risk INTEREST RISK is defined as the risk of change in the value of an asset as a result of volatility in interest rates .Though the risk is said to arise due to an unexpected move, generally, investors are concerned with  downside risk . - This risk directly affects the fixed-rate security holder. Whenever the interest rate rises, the price of the fixed-income bearing security falls and vice-a-versa