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Chapter 5: Q1DQ. (page 679)

What risks does a foreign affiliate of a multinational firm face in today's business world?

Short Answer

Expert verified

Business risks, foreign exchange risk, and political risk

Step by step solution

01

Explanation of Multinational Firm

A multinational corporation generally invests 30% of the firm's business activities in other countries or outside national borders.

02

Risks of foreign affiliate

Firstly, Foreign affiliates of multinational corporations will have business risks: realted sales, market share, competition, etc.

Foreign exchange risk refers to the risk involved due to the exchange rate of currency, as it may go up or down compared to the home country's currency price.

Political risk refers to risks that arises due to political conditions in a foreign country. These adverse political conditions related to will affect negatively to multinational corporation.

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Most popular questions from this chapter

Explain the functions of the following agencies:

Overseas Private Investment Corporation (OPIC)

Export- Import Bank (Exim bank)

Foreign Credit Insurance Association (FCIA)

International Finance Corporation (IFC)

What is a letter of credit?

List the factors that affect the value of a currency in foreign exchange markets.

What allegations are sometimes made against foreign affiliates of multinational firms and against the multinational firms themselves?

You are the vice president of finance for exploratory resources, headquartered in Houston, Texas. In January 20X1, your firm鈥檚 Canadian subsidiary obtained a six-month loan of 150,000 Canadian dollars from a bank in Houston to finance the acquisition of a titanium mine in Quebec province. The loan will also be repaid in Canadian dollars. At the time of the loan, the spot exchange rate was U.S. \(0.8995/ Canadian dollars and the Canadian currency was selling at a discount in the forward market. The June 20X1 contract (face value = C\)150,000 per contract) was quoted at U.S. $0.8930/ Canadian dollar.

a. Explain how the Houston bank could lose on this transaction assuming no hedging.

b. If the bank does hedge with the forward contract, what is the maximum amount it can lose?
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