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MANAGING RISK IN INTERNATIONAL BUSINESS

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Information about MANAGING RISK IN INTERNATIONAL BUSINESS

Published on October 31, 2008

Author: reynolds

Source: slideshare.net

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MANAGING RISK IN INTERNATIONAL BUSINESS Techniques and Applications

The Three Steps to Effective International Risk Management Identify the individual risks Assess risk magitudes and exposure levels Incorporate the risk assessment in the decision making process

Identify the individual risks

Assess risk magitudes and exposure levels

Incorporate the risk assessment in the decision making process

Political Risk Definition Sources Assessment techniques

Definition

Sources

Assessment techniques

Modern Tools of Financial Decision Making Required input: MARKET DATA Mean-variance analysis Contingent claims analysis Modigliani-Miller

Required input: MARKET DATA

Mean-variance analysis

Contingent claims analysis

Modigliani-Miller

Shortcomings of Traditional Techniques Unsuited to modern financial decision making data parameters applications Generally imprecise and difficult to apply

Unsuited to modern financial decision making

data

parameters

applications

Generally imprecise and difficult to apply

The New Framework Overcomes These Shortcomings Uses market data (international prices) Generates parameters compatible with modern portfolio and option pricing theory

Uses market data (international prices)

Generates parameters compatible with modern portfolio and option pricing theory

Generating the Data: Four Steps Establish accounting discipline Define income flows Define expenditure flows Link income and expenditure to the balance sheet

Establish accounting discipline

Define income flows

Define expenditure flows

Link income and expenditure to the balance sheet

Important New Decision Making Parameters Macroeconomic profits Market value of the economy The economy’s rate of return The economy’s financial risk premium The economy’s systematic risk (beta)

Macroeconomic profits

Market value of the economy

The economy’s rate of return

The economy’s financial risk premium

The economy’s systematic risk (beta)

Assessing Country Specific Financial Risk Estimate standard deviation of country rate of return Estimate total amount of foreign debt and its duration Apply the information in the Black-Scholes option pricing formula

Estimate standard deviation of country rate of return

Estimate total amount of foreign debt and its duration

Apply the information in the Black-Scholes option pricing formula

New Parameters: Examples The financial risk premium Insolvency or illiquidity The maximum debt level Implied volatility

The financial risk premium

Insolvency or illiquidity

The maximum debt level

Implied volatility

A Big Question DOES IT WORK?

CLARK vs . EUROMONEY The Forecast 1988 The Clark forecast: Euromoney , September 1988, page 234 60 countries The EUROMONEY forecast: Euromoney , September 1988, page 235 117 countries

The Clark forecast: Euromoney , September 1988, page 234

60 countries

The EUROMONEY forecast: Euromoney , September 1988, page 235

117 countries

CLARK vs. EUROMONEY The Result 1993

Estimating Systematic Risk Construct the World Index Estimate macroeconomic market value for each country Sum the market values of all countries to create the world index Regress country returns against percentage change in world index to estimate Beta

Construct the World Index

Estimate macroeconomic market value for each country

Sum the market values of all countries to create the world index

Regress country returns against percentage change in world index to estimate Beta

Performance Measurement INTERNATIONAL PORTFOLIOS

Money Market Portfolios 1982-1991

Long Term Government Bond Portfolios 1982-1991

Equity Portfolios 1982-1991

Excess Return to Risk for Selected Portfolios 1982-1991

Outline Brief review of traditional international risk analysis Presentation of new techniques Applications direct investment portfolio investment cross border loans

Brief review of traditional international risk analysis

Presentation of new techniques

Applications

direct investment

portfolio investment

cross border loans

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