International Financial Management Foreign Exchange Exposure

Question: Discuss about the International Financial Managementfor Foreign Exchange Exposure. Answer: Major Dimensions that Distinguish International Finance from Domestic Finance One of the primary differences between international finance and domestic finance is foreign exchange exposure that affects all the business areas at international level. Exposure to foreign exchange provides impact on purchase of materials from the suppliers, sales to consumers, investment activities and sources for raising funds. Foreign exchange exposure indicates the risk involved in international business with respect to the foreign exchange rates, which changes recurrently (Manova, 2013). In the present case, the company earned more than $12 billion sales annually most of which is earned outside United States. Considering the foreign exchange exposure, it can be said that the sales earned from other country would decline if the foreign exchange rate of other country increases. Another dimension that distinguishes international finance and domestic finance is business environment at macro levelas international finance is exposed to the political environment. International finance associates with different trade policies of different countries unlike in case of domestic finance that associates with the trade policy of home country only. In the given situation, Nike has no production facilities in United States that means the company has to import the products to U.S. involving higher cost and compliance of several trade policies. International finance and domestic finance also differs with respect to the tax and legal regulations that affects the companys profitability and product costs resulting in the sustainability of domestic company in the foreign country (Chaney, 2014). As the Nike Company, hired workers at low wage rate due to poor and unhealthy work environment, legal regulation with respect to labor laws affect the protection of labor rights in the respective countries. Analysis of Nikes Action to Support International Financial management goal of Shareholder Wealth maximization The primary objective of international financial management includes wealth maximization for shareholders that indicates maximization of present value of future cash flows as return from investment. Apart from the profit maximization goal of the respective companies, maximization of shareholders value is considered to be equally important for which the organizations undertake several steps. Shareholders wealth maximization takes place by foreign investment, raising funds at lower costs and increasing the employment rate that boosts the companys share price and economic value (Bernstein, Lerner Schoar, 2013). Accordingly, in the present case, Nike constructed the production facilities in the Asian countries to improve the employment rate together with the protection of labor rights. Nike also incorporated the activities to develop the economies and improve the living standards of the citizens that helped in enhancement of overall economy of the host countries. The activities of the organization involved the actions to monitor the work practices and factories in other countries as well as conducted periodic inspection by unrelated parties, which eventually improved the standards of labor (Niepmann Schmidt-Eisenlohr, 2014). These actions undertaken by Nike can be considered as actions to improve the organizational value and sustainability together with the benefits to the customers and other stakeholders. As a result, the stock price of the company will rise and can be considered as support to the international financial management goal for shareholders wealth maximization. Analysis of International Trade as more Risky from the Exporters Perspective International trade risks are the barrier that affects the growth of international trade that involves economy threats and restrictions especially from the perspective of exporters. It has been noted that the international trade involves high cost structure due to charges on tariffs, delay cost, cost due to difference in legal system, custom duties and other transfer costs. Further, international trade incorporates lack in mobility in production factor that is labor or capital and includes restrictions in exchange of products and services across the border. The international trade associates with several economic risks that incorporate concession risk in the economic control factor relating to the difference in political or legal differences (Mancini, Ranaldo Wrampelmeyer, 2013). Risk in international trade from the exporters perception includes insolvency risk of the importer or non- acceptance risk by the importer due to which exporter may incur loss or low revenue that declines the profitability. In certain cases, exporters face risk on receipt of payment for the transfer of goods and services across the border together with the risk of fluctuation in foreign exchange risk that declines the value of money to be received against the export order. Other risks that are involved in international trade for the exporter like political risk of the importing country, commercial risk or regulations specifying lack of foreign currency affect the profitability and sustainability of the export traders (Chaney, 2016). Reference List Bernstein, S., Lerner, J., Schoar, A. (2013). The investment strategies of sovereign wealth funds.The Journal of Economic Perspectives,27(2), 219-238. Chaney, T. (2014). The network structure of international trade.The American Economic Review,104(11), 3600-3634. Chaney, T. (2016). Liquidity constrained exporters.Journal of Economic Dynamics and Control,72, 141-154. Mancini, L., Ranaldo, A., Wrampelmeyer, J. (2013). Liquidity in the foreign exchange market: Measurement, commonality, and risk premiums.The Journal of Finance,68(5), 1805-1841. Manova, K. (2013). Credit constraints, heterogeneous firms, and international trade.The Review of Economic Studies,80(2), 711-744. Niepmann, F., Schmidt-Eisenlohr, T. (2014). International trade, risk and the role of banks.