Fundamentals of International Financial - MyAssignmenthelp.com

Question: Discuss about the Fundamentals of International Financial. Answer: Introduction This report is undertaken for providing an understanding of the concepts of international financial management. In this context, the report discusses the role of international financial markets and currency derivatives in the management of the finances of a selected international firm. The international firm selected for the purpose is Samsung Group, a multinational company headquartered in South Korea. The report has presented background information of the company discussing its major business activities. The exposure of the company to the foreign exchange risks is discussed in the report along with the strategies that can be used for managing the risks identified. Background of Company Rationale for the Selection The Samsung Group is a multinational electronic company that provides its electronic product and services across the world. The company is selected as it operates on a global platform and therefore there is huge impact of international financial markets on its operational activities. The company operating internationally is highly exposed to the risk of foreign exchange and therefore selected for analysis purpose (Lee, 2006). Brief History on its Emergence as Global Firm The company was established in the year 1983 initially as a trading company and diversified its operational functions into food processing, insurance, securities and retail. However, it entered into the electronics industry in 1960s and initially carried out its business operations in South Korea. However, after achieving success in the electronics market it globalised its activities in this market and is presently recognized as a leader in developing mobile phones and semiconductors (Michell, 2011). Key business activities and the Countries in which it carries out Its International Activities The company is actively involved in manufacturing of electronic components, medical equipment, semi-conductors, and solid state drivers, telecommunications equipment and home appliances. Besides this, it also provides services such as advertising, construction, entertainment, financial and health care services. The company provides its products and services across the world (Lee, 2006). Company Exposure to Foreign Exchange Risk The company serves to all parts of the world and therefore has to incur gains and losses in currency due to foreign exchange risk. The company has to face foreign currency risk due to various functional currencies of different countries in which it operates. The foreign currency risk occurs due to currency volatility due to exchange positions of currencies such as US Dollar, Euro, Japanese and Yen. The current foreign currency exposure of the company for USD, Euro and Yen on the basis of a hypothetical 5% currency rate change against Korean won (KRW) at the end of the financial year 2016 can be depicted as follows. (Samsung electronics co., ltd, 2016): (Source: https://images.samsung.com/is/content/samsung/p5/sg/ir/docs/170331_2016_Business_Report_vF.pdf) The Role of International Financial Markets and Currency Derivatives in Managing the Companys Finances The company conducting its operations in foreign markets and involved in international trade activities is on the risk of global currency fluctuations. This is because the rapid change in the currency conversion rates can negatively impact the performance of its business units in different countries. As such, it is essential for the company to analyze the risks associated with carrying out its business on international level for developing effective strategies for its reduction. The use of financial derivatives such as futures, swaps and options offer new ways for managing the finances (Kevin, 2009). Derivatives are means to hedge the financial risks that can arise in future due to the present actions of the company. Transactions that are influenced due to international changes in currency rates, interest rates can be easily be managed by the use of derivatives. The most common use of derivatives in managing the company finances is hedging the foreign currency risks. Foreign currency risk arises due to change in exchange rate of currency in the international market. This type of risk is very critical and requires great attention of the multinational companies. Through use of derivatives (Futures and Options), company can hedge the future international payments or receipts so that net fluctuations in the net payment and net receipt at exercise date is minimum (Levi, 2007). Derivatives are also used to hedge the interest rate risk. Interest rate risk arises due to changes in interest rate in home country and also in international country. So derivatives play an important role in ma naging such risk. Samsung actively uses derivative to hedge both the currency risk and interest rate risk as there are huge number of transactions that are made internationally by the Microsoft and they need to hedge using the derivatives (Swensen, 2009). Methods/strategies of managing risk used by the company The company for reducing the foreign exchange risk has developed and implemented a foreign exchange management policy. The foreign exchange management policy of the company has directed the business transactions such as imports and exports to be carried out in the domestic currency or matching the cash-in currency with cash-out currency. The policy also provides a definition of the foreign exchange risk, measuring period, responsibilities of the owner, management policies, hedging period and ratio. This policy of the company has also restricted the carrying out of all the speculative foreign exchange transactions. In addition to this, the company has also introduced a global foreign exchange system for managing the exposures associated with the use of receivables and payables that are denominated in the foreign currencies. The subsidiaries of the company also incorporates the use of hedging for offsetting the risk associated with the use of foreign currency through trading currency f orward contracts. The overseas business unit of the company buy or sell its currency forwards having maturity of less than a year through the use of banking institutions for minimizing the exchange risks (Jones, 2009). Conclusion Thus, it can be stated from the overall discussion held in the report that business organizations operating on a global level should identify the risk of foreign currency exchange. The identification of these types of risks is essential for developing effective strategies to minimize such risk. The reduction in the foreign currency risk is essential for multinational companies to achieve success in different parts of the world. References Jones, C. 2009. Investments: Analysis and Management. John Wiley Sons. Kevin, S. 2009. Fundamentals of International Financial Management. PHI Learning Pvt. Ltd. Lee, D. 2006. Samsung Electronics: The Global Inc. LEE Dongyoup. Levi, M. 2007. International Finance: Contemporary Issues. Routledge. Michell, A. 2011. Samsung Electronics and the Struggle for Leadership of the Electronics Industry. John Wiley Sons. Samsung electronics co., ltd. 2016. Business Report. Retrieved 5 December, 2017, from https://images.samsung.com/is/content/samsung/p5/sg/ir/docs/170331_2016_Business_Report_vF.pdf Swensen, D. 2009. Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated. Simon and Schuster.