Acquiring ownership of a foreign company exposes the MNC to a wide range of factors and risks, including political risk, operational risk and more. Each of these risks carries costs or potential costs that will impact the profitability of the project.
Another risk that the finance department must consider when expanding internationally is foreign currency risk (BNet, 2010). There are two sides to foreign currency risk -- transactional and translational. Transactional risk is the risk that currency fluctuation will impact the profitability of a transaction. In other words, suppose the MNC has the bulk of its costs in U.S. dollars but has some of its revenues in Japanese yen as a result of its new operations. As the yen fluctuates, the value of those revenues in U.S. dollar terms will fluctuate.
Thus, there is a need to develop adequate hedging strategies. It is difficult to hedge against translational risk -- the value of those revenues when brought back to a U.S. income statement for example. However, the firm can hedge against transactional risk. For example, the firm could develop an operating hedge. An example of this would be Wal-Mart's stores in China, which allows them to bring in Chinese yuan in order to offset the yuan-denominated expenses they occur in the course of their procurement operations in that country. The finance department can advise on operating hedges as part of the mode of entry decision as well.
The finance department can also set up hedges for transactional risk. There are many methods of such hedging, but they all have the same objective of locking in the value, or reducing downside risk of a transaction. Setting up these hedges is one of the most important areas of focus for finance departments at multinational corporations.
One further consideration for finance departments is the impact of the international expansion on the accounting statements. The...
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