Risk Management

Risk management

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        Multinational enterprises are firms that are playing leading roles in R and D investments, technological innovations and patenting. Due to their size and the market, they serve they tend to benefit from economies of scale and scope, and they have financial capacities that are strong enough to invest in innovation projects that are risky. Putting into consideration on an MNE that is in Japan but has facilities in the United States, it is obvious that some financial statements are prepared in Yen. Below is a discussion on the various risk management that it is exposed to and the strategy that can be used to combat the economic fluctuations (ZARB, 2004).

Transaction risk

This is the impact as a result of exchange rates which changes the value of the committed cash flows. These mostly include the receivables from exports, payables from imports and the repatriation of dividends. This is in most cases happens when the time frame for the transactions that are committed is relatively short. However, it can happen in some cases when the deliveries are committed in advance for a long time.

Economic risks

This is the impact due to exchange rate movements on the present value of cash flows that are uncertain. It includes the variation of exchange rates on the future expenses and revenues through both variation in volume and price.

Translation risk

This is the impact of exchange rate changes when foreign assets and liabilities are being valued on the consolidated balance sheet of a multinational company. In most case the translation risk is measured in net terms.

To eliminate these risks, the managers can use a hedge design. Hedging applies when the exporters eradicate the risk at least partially rather than shifting the risk of exchange rates to their counterparts. Hedging can be distinguished from two forms including the financial and the operational hedges. Financial hedges include the derivative instrument and foreign currency borrowing. The operational hedge is the geographical diversification of sourcing, production, and sales. More to these managers can use the enterprise risk management approach which considers all the risks simultaneously and manages them in a holistic context (Rose, 2007).