MANAGING RISK IN INTERNATIONAL BUSINESS
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
MANAGING RISK IN INTERNATIONAL BUSINESS
The Three Steps to Effective International Risk Management
Identify the individual risks Assess risk magitudes and exposure levels Incorporate the risk assessment in the
decision making process
Political Risk
Definition Sources Assessment techniques
Modern Tools of Financial Decision Making
Required input: MARKET DATA Mean-variance analysis Contingent claims analysis Modigliani-Miller
Shortcomings of Traditional Techniques
Unsuited to modern financial decision making data parameters applications
Generally imprecise and difficult to apply
The New Framework Overcomes These Shortcomings
Uses market data (international prices)
Generates parameters compatible with modern portfolio and option pricing theory
Generating the Data: Four Steps
Establish accounting discipline Define income flows Define expenditure flows Link income and expenditure to the balance
sheet
Important New Decision Making Parameters
Macroeconomic profits Market value of the economy The economy’s rate of return The economy’s financial risk premium The economy’s systematic risk (beta)
Assessing Country Specific Financial Risk
Estimate standard deviation of country rate of return
Estimate total amount of foreign debt and its duration
Apply the information in the Black-Scholes option pricing formula
New Parameters: Examples
The financial risk premium Insolvency or illiquidity The maximum debt level Implied volatility
A Big Question
DOES IT WORK?
CLARK vs . EUROMONEY
The Forecast 1988 The Clark forecast: Euromoney, September 1988, page 234 60 countries
The EUROMONEY forecast: Euromoney, September 1988, page 235 117 countries
CLARK vs. EUROMONEYThe Result 1993
0
0,2
0,4
0,6
0,8
1
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57
Exhibit 6.9 - Percent of Unrescheduled Debt at Each
Rank
Clark
Euromoney
Estimating Systematic Risk
Construct the World Index Estimate macroeconomic market value for each
country Sum the market values of all countries to create
the world index
Regress country returns against percentage change in world index to estimate Beta
Performance Measurement
INTERNATIONAL PORTFOLIOS
Money Market Portfolios1982-1991
Optimized GDP weights Equal weights Jap-Ger-Switz
Arithmetic.mean
13% 12% 11.8% 11.0%
Geometricmean
12.7% 11.2% 11.1% 9.9%
Standarddeviation
7.5% 13.3% 12.4% 15.7%
Return/SD 1.733% 0.902% 0.952 0.701%
Long Term Government Bond Portfolios1982-1991
Optimized GDP weights Equal weights Jap-Ger-Switz
Arithmeticmean
14% 12.4% 12.5% 11.8%
Geometricmean
13.5% 11.6% 11.8% 10.8%
Standarddeviation
11% 13.2% 13.2% 15.7%
Return/SD 1.273% 0.939% 0.950% 0.753%
Equity Portfolios1982-1991
Optimized Equal weightswith US
Equal weightswithout US
Jap-Ger-Switz
Arithmeticmean
20.11% 15.89% 16.77% 17.45%
Geometricmean
17.44% 14.2% 14.83% 14.92%
Standarddeviation
25.56% 20.64% 22.08% 25.85%
Return/SD 0.7868% 0.76.99% 0.7596% 0.6750%
Excess Return to Risk for Selected Portfolios1982-1991
Optimized Equal Weights Jap-Ger-Switz
Money market 0.700 0.331 0.210
LT govt. bond 0.567 0.364 0.261
Equity index 0.484 0.409 0.375
Source: E. Clark, “A general International market index”, International Journal of Finance,vol. 3, (1995) 1288-1312
Outline
Brief review of traditional international risk analysis
Presentation of new techniques Applications
direct investment portfolio investment cross border loans
Related Documents
