(i) Expanded opportunity sets.
When firms go global, they also tend to benefit from expanded opportunities which are available now. They can raise funds in capital markets where cost of capital is the lowest. In addition, firms can also gain from greater economies of scale when they operate on a global basis.
(ii) Political risk.
Another risk that firms may encounter in international finance is political
risk. Political risk ranges from the risk of loss (or gain) from unforeseen government actions
or other events of a political character such as acts of terrorism, elections, to outright
expropriation of assets held by foreigners for example, Zimbabwe and the land issue. MNCs must
assess the political risk not only in countries where it is currently doing business but also
where it expects to establish subsidiaries.
(iii)Foreign exchange risk.
An understanding of foreign exchange risk is essential for managers and investors in the modern day environment of unforeseen changes in foreign exchange rates. In a domestic economy this risk is generally ignored because a single national
currency serves as the main medium of exchange within a country. When different national
currencies are exchanged for each other, there is a definite risk of volatility in foreign
exchange rates.
(iv) Market imperfections.
The final feature of international finance that distinguishes it from domestic finance is that world markets today are highly imperfect. There are profound differences among nations’ laws, tax systems,business practices and general cultural environments. Imperfections in the world financial markets tend to restrict the extent to which investors can diversify their portfolio. Though there are risks and costs in coping with these market imperfections, they also offer managers of international firms’ abundant opportunities.
maurice.mutuku answered the question on April 25, 2019 at 06:04