MNC’s Risks

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MNC’s Risks

Operating a business is sometimes a dangerous occupation considering the kinds of risks facing businesses. Some of these hazards have the potential of bringing down businesses while in some cases it caused serious damage which may turn out to be time consuming and costly to repair. Despite this, risk managers and other managers are able to prepare for such risks and ensure that their effects do not turn to be severe on the business especially if they can get a good comprehension of such risks on them.

Investing in a business that may be affected by the risks associated with the use of different currency denominations can sometimes be risky (Flannery & Rangan, 2006). However, one can take certain measures to mitigate such risks without having to opt for lower returns. One of such measures is matching life liabilities and life assets. Both life liabilities and assets contain a currency denomination. MNC’s stocks have the currency denomination of the home country while bonds may have a foreign currency denomination. Matching the two in a given portfolio can help in establishing a healthy balance. For instance an American expatriate family living in the UK may choose to purchase more stocks of a firm located in the US and less bonds if it intends to relocate back to the US sometime later while still in ownership of shares.

Risks associated with legal and economic differences existing between different countries can also affect MNC’s financial structure, risk and capital structure (Connell, 2004). Legal differences mean that the firm will be forced to have different structures of capital and finance to cater for the needs of some of its clients who hail from the various regions. For instance, a customer in another country may have to abide to certain procedures that may be different from those of MNC’s home country making the whole process complex and as such risky. Varying levels of economic development may mean differences in the amount of profits coming from the various markets and variation in the returns on investment. A similar effect is observed with respect to the roles played by different governments (Hibbert & Turnbull, 2003).

Clearly, there are numerous risks that are bound to have an effect on MNC’s financial structure and capital structure decisions as well as its risks. These may be economic and or legal in nature. They may also be associated with currency denominations. However, with proper strategies in places, such risks can be mitigated to guard against low returns.

References

Connell, C. M. (2004). Transformation of a business in risks: knowledge and learning for reinvention. Management Decision, 42(9), 1178-1196.

Flannery, M. J., & Rangan, K. P. (2006). Partial adjustment toward target capital structures. Journal of Financial Economics, 79(3), 469-506.

Hibbert, A. J., & Turnbull, C. J. (2003). Measuring and Managing the Economic Risks and Costs of With-Profits Business. British Actuarial Journal, 9(05), 1141-1154.