tailieunhanh - Brealey−Meyers: Principles of Corporate Finance, 7th Edition - Chapter 28

CHAPTER TWENTY-EIGHT MANAGING INTERNATIONAL RISKS In the last chapter we considered the risks that flow from changes in interest rates and commodity prices. But companies with substantial overseas interests encounter a variety of other hazards, including political risks and currency fluctuations. | Brealey-Meyers VIII. Risk Management 28. Managing International The McGraw-Hill Principles of Corporate Finance Seventh Edition Risks Companies 2003 CHAPTER TWENTY-EIGHT 786 Brealey-Meyers Principles of Corporate Finance Seventh Edition VIII. Risk Management 28. Managing International Risks The McGraw-Hill Companies 2003 IN THE LAST chapter we considered the risks that flow from changes in interest rates and commodity prices. But companies with substantial overseas interests encounter a variety of other hazards including political risks and currency fluctuations. Political risk means the possibility that a hostile foreign government will expropriate your business without compensation or not allow profits to be taken out of the country. To understand currency risk you first need to understand how the foreign exchange market works and how prices for foreign currency are determined. We therefore start this chapter with some basic institutional detail about the foreign exchange market and we will look at some simple theories that link exchange rates interest rates and inflation. We will use these theories to show how firms assess and hedge their foreign currency exposure. When we discussed investment decisions in Chapter 6 we showed that financial managers do not need to forecast exchange rates in order to evaluate overseas investment proposals. They can simply forecast the foreign currency cash flows and discount these flows at the foreign currency cost of capital. In this chapter we will explain why this rule makes sense. It turns out that it is the ability to hedge foreign exchange risk that allows companies to ignore future exchange rates when making investment decisions. We conclude the chapter with a discussion of political risk. We show that while companies cannot restrain a determined foreign government they can structure their operations to reduce the risk of hostile actions. THE FOREIGN EXCHANGE MARKET An American company that imports goods from France .