RISK IN INTERNATIONAL BUSINESS

Risk happens on account of uncertainty about happening of an event like loss, damage, variations in foreign exchange rates, interest rate variations, etc. Every business manager is always risk averters, i.e., managers usually do not want to take risk. Hence, he likes to work out higher probability for creating wealth and profit. He likes to work as hedger. The variance or changes of the real domestic currency value of assets, liabilities or operating income on account of unanticipated changes in exchange rates referred as Foreign Exchange Risk. This risk relates to the uncertainty attached to the exchange rates between the two currencies.

If an Indian businessman borrows some amount viz. dollars and has to repay the loan in dollars only over a period of time, then he is said to be exposed to the foreign exchange rate risk during the currency of loan.

Thus, if the dollar becomes stronger (costly) vis-a-vis rupees (cheap) or depreciated during the period then the businessman has to repay the loan in terms of more rupees than the rupees he obtained by way of loan. The extra rupees which he pays are not due to an increase of interest rates, but because of the unfavourable foreign exchange rate.
Thus we learn that there are risks in international business as well as there is no prediction about future currency changes which if change will impact a lot .

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