Risk Management Strategies in International Markets

Risk Management Strategies in International Markets

DOI: 10.4018/978-1-7998-2007-9.ch002

Abstract

On an operational level, companies with processes of internationalization are confronted with credit risks, interest rate risks, and foreign exchange risks in trade and financial operations that they perform daily within their operating cycle, transforming sometimes great opportunities into financial catastrophes. As these risks strongly affect companies' normal activities in international markets through higher financial costs arising from receipts that don't occur, from unfavorable exchange differences or negative evolution's in the interest rates, different strategies to manage these risks will next be addressed. At first, the payment techniques and sources of financing in international trade that allow to mitigate the credit risk and to protect the company's treasury will be presented. Then, the techniques to hedge exchange risk and interest rate risk will be studied to highlight how they could improve the international businesses' margins.
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Introduction

As mentioned in the last chapter, the decision of internationalization, involves a series of risks, amongst other, the entry mode in foreign markets, company’s competitiveness, markets context and the risks of the countries involved in the companies’ business.

As such, the decision of internationalization must be the result of the strategic analysis, to assess both the economic and financial viability, to approach new markets, as well as the potential benefits to be obtained given the associated costs.

Also, and on an operational level, companies are confronted with credit risks, interest rate risks and foreign exchange risks, in commercial and financial operations that they perform daily within their operating cycle, transforming sometimes-great opportunities into financial catastrophes. As these risks strongly affect companies’ normal activity in international markets through higher financial costs, arising from receipts that do not occur, from unfavorable exchange differences or negative evolutions in the interest rates, we will address next different strategies to manage those risks.

At first, the payment techniques and sources of financing in international trade, that allow to mitigate the credit risk and to protect the company's treasury, will be presented. Then, the techniques to hedge exchange risk and interest rate risk will be studied, to highlight how they could improve the international business’ margin.

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