Foreign direct investing abroad provides corporations with opportunity to explore new markets and resources and reduce business risk by diversifying business portfolio.
Sometimes, expectations of a foreign currency to appreciate against a home currency play a significant role in making a business allocation decision. Similar expectations will encourage portfolio investors to invest abroad along with some other advantages provided by foreign capital markets.
Borrowing in foreign capital markets are sometimes motivated by expectations of a foreign currency to depreciate against the home currency and therefore, coupled with lower interest rates existing in a foreign country to achieve lower cost of capital. Foreign exchange market facilitates investments and borrowing in foreign countries by allowing investors and borrowers to exchange currencies. Currency exchange rates’ movements might be caused by relative changes in inflations rates, income level, government regulations and control, some other macro-economical factors.
Any time a decision to invest/borrow in a foreign currency is being made by a corporation and/or portfolio investors it must be carefully considered, meticulous scenario analysis undertaken and hedging strategy should be elaborated.
There are three types of foreign exchange risk exposure company runs: translation, transaction and economic exposure.
Modern financial markets provide an array of financial and non-financial instruments to manage both transaction and economic exposure. Both interest rates risks and exchange risks must be carefully managed in order to allow investors and borrowers to take the exactly amount of risk to deliver the best risk-return trade-off.
Our consultants provide all the expertise necessary to manage these types of risk, undertaking scenario analysis, using sophisticated forecasting techniques to forecast the interest and exchange rates in the future and using a vast array of financial vehicles in order to manage the above mentioned types of risks.