Foreign exchange risk occurs as a result of the change in foreign currency exchange rates. For instance, a company that deals with exports and imports may have the exchange rates that it is using changing after agreeing on the terms of trading and before the delivery of the goods. This can either work for, as well as against the concerned party. It is noted that those countries that have unstable economies and have volatile exchange rates are more vulnerable to foreign exchange risks. Some businessmen/women do gamble with the changes in exchange rates to make huge profits. However, this process is extremely risky as it can lead someone into a huge financial loss. An organization may suffer from a reduction in the return of an investment as a result of a change in the rate of exchange between two currencies.
For example, an organization that needs Euros in 6 months the time may protect itself from currency fluctuations through the hedging mechanism that safeguards the value of its money. This process entails investing the Euros in high-yielding financial instruments such as bonds, real estates, precious stones as well as shares and then converting them into monetary means after six months (Hakala & Wystup, 2000). Globalization is the amalgamation of political, cultural systems, as well as economies of the world. Advancement in technology has greatly enhanced globalization in the last ten years.
Many international companies have used advanced technology and especially the great development in Information Technology for their advantage to extend their operations to foreign regions in search of cheaper production regions as well as extending their markets for their products and services. The high rate of globalization that has been witnessed in the last ten years is likely to force all trading nations to adopt a common currency in order to minimize foreign exchange risks that are associated with international trading (Stiglitz, 2002).
Capital is imperative in enhancing the expansion of companies. A private company like Kudler Fine Foods that aspires to expand its operations can opt to do so through various methods. Kudler Fine Foods Company may consider expanding through Initial Public Offering, where it will engage an investment bank to help it in underwriting as well as the allocation of shares to interested investors. Through the money the company receives from the sale of shares, the company can use it to expand its operations to other regions. The limitation with the IPO process is that the company loses most of its revenues to the investors who are allocated shares at a discounted rate by the investment bank, which makes them make huge profits during the first trading day.
In addition, this process is very expensive because of the huge costs that are paid as transaction fees to the investment bank concerned with the deal. The benefit that is mainly associated with the IPO process is that it is a faster process for a company to raise the required capital to expand its operations. Another strategy Kudler Fine Foods Company may consider using to extend its operation is by acquiring another company that deals with similar products. This process is a very common strategy that many firms are nowadays adopting in order to expand their operations.
This strategy is very beneficial to both parties involved as the shareholders who they firm is being acquired are compensated accordingly, and the other company enjoys lesser competition as the acquired firm, together with its customers, become part and parcel of the mother company that acquires it. The main challenge in this type of expansion is the high initial costs that are involved in the acquisition process. The company conducts a valuation and buys the shares of the shareholders of the company being acquired at an agreed rate and also pays a fixed amount as goodwill.
The merger is another common strategy that many companies use to extend their operations. Mergers result from similar companies, offering similar products, and mainly operating in the same markets. Mergers help films to get bigger market shares in order to enjoy the benefits of the volume of scales. The main challenge that is associated with mergers is the duplication of responsibilities since some staffs from the two firms find themselves having conflicting responsibilities that may hinder the efficiency of the resultant merger for a while before they are resolved (Smith, 2012).
Reference List
Hakala, J & Wystup, U. (2000). Foreign Exchange Risk. Cambridge: Cambridge University Press.
Smith, P. (2012). IPO: A Global Guide. New York: Prentice Hall.
Stiglitz, J. (2002). Globalization and its Discontents. New York: Prentice Hall.