Country Risk Analysis

2682 words - 11 pages

Country Risk AnalysisStar Jeans Company, in its quest for international exposure, must perform an initial country risk analysis for Brazil. The country risk analysis will examine the economic, translation, and transaction exposure along with the political, socio-economic, and environmental risks pertinent to Star Jeans Company expanding into Brazil. Star Jeans Company will also use various analysis techniques to mitigate the risks identified in venturing into business in Brazil. The results of the analysis will be interpreted using qualitative and quantitative techniques that will allow Star Jeans Company to prepare to make a direct foreign investment decision.Economic ExposureThe main concern with economic exposure is that it affects the value of the company's cash flows through the fluctuation of foreign exchange rates. Star Jeans Company is looking into expanding to Brazil; therefore, it must pay close attention to the exchange rate fluctuations of the U. S. dollar (USD) and the Brazilian real (BRL). Managers at Star Jeans Company will need to hedge economic exposure if they decide to expand into Brazil. As stated in Investopedia, many international companies are significantly uncovered to economic exposure. (2007). Star Jeans Company's cash flows are at risk of being affected by exchange rate fluctuations, in this case fluctuations of the BRL. Star Jeans Company's strategy must include the consideration of selling future foreign currency, equal to the company's current net revenues in foreign currency.One way of achieving this is by participating in the foreign exchange market (Forex or FX) where currencies are traded. "The overall forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion [USD] per day and includes all of the currencies in the world" (Investopedia, 2007, 1). In addition, forex is a seamless 24-hour market as the locations in Sydney, Japan, Singapore, London, and New York provide different time zones. These different time zones give traders the opportunity to closely manage their investments and respond to favorable and unfavorable developments with immediate trading opportunities. As Star Jeans Company prepares for the decision to expand into Brazil, it will study and consider the forex market as a hedging strategy to minimize economic exposure.Translation ExposureOne of the major risks of investing in foreign territory is translation exposure. According to Investopedia, translation exposure, also referred to as accounting exposure, is defined as "the risk that a company's equities, assets, liabilities, or income will change in value as a result of exchange rate changes" (2007, 1). Of course, it is impossible to anticipate any significant changes in the foreign exchange rate; however, it is possible for a firm to overcome such changes, to some extent. One of those methods is to use a money market hedge, which is "borrowing and lending in multiple currencies, for...

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