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Globalization and its impacts on the financial market have drawn a lot of attention over the past few years. Apparently, investing in the global market brings with it both rewards and challenges. It is faced with the issues, such as the need for developed market diversification and the exploration of the emerging markets. In order to effectively address these challenges, it is necessary to take preventive measures, such as the covariance and correlations for different investing styles and venture sectors (Evanoff, Hoelscher, & Kaufman, 2009, p. 72).
Despite the likely risks involved, globalization has proved to have various potential benefits, as seen in many countries across the world. In this respect, it also brings several fresh challenges for policymakers. These difficulties occur in terms of management of financial globalization, so as to fully benefit from the generated opportunities while ensuring the reduction of the implied risks. This is an important factor for consideration, given the fact that the ever-increasing potential benefits of financial globalization are likely to grow over time. Increased level of globalization has also ensured deeper integration of nations leaving governments with limited policy instruments. Therefore, this calls for the need to establish first-class international financial cooperation (Evanoff, Hoelscher, & Kaufman, 2009, p. 183).
Diversification is a financial practice through which organizations participate in a wide variety of asset investments with the aim of reducing risks. It depends on the absence of a tight positive relationship between the returns of the asset. It works smoothly if the correlations are close to zero or slightly positive. Due to globalization, several multinational companies have engaged themselves in the diversification of their businesses. In this regard, they have established a number of ways to protect themselves against risks in their host countries. Some of these threats include political turmoil, inflation, and low stock exchanges (Evanoff, Hoelscher, & Kaufman, 2009, p. 241).
Diversification has ensured the expansion of remote areas by companies and multinational organizations, which, as a result, helps a lot in spreading the risks further. However, diversification is controlled by market forces and its needs, while its dissatisfaction and inability to meet the trade requirements are associated with the business and greatly affect the last. Most of the multinational companies have a huge asset base, and in order to protect themselves against the risks, they normally insure themselves. Some of them are too huge, actually bigger than most insurance companies (Evanoff, Hoelscher, & Kaufman, 2009, p. 279).
Navigating political risks requires a multinational company to assess the information according to which the host country rates its sovereign debt. This is an assumption that is based on the pretext that a threat in a given sphere of business operation cannot make the whole business collapse. The use of financial markets is another method of protection against risks, which can be used by multinational companies to guard themselves. A good example of this point is the use of derivatives. This involves basing the security contracts on any of the eventualities that are likely to occur, together with seizing the profits or assets (Evanoff, Hoelscher, & Kaufman, 2009, p. 311).
Financial globalization should work for good because of the benefits associated with it. Besides reducing the financial volatility, it brings about financial liberation, which affects the financial systems are extremely positive. It is evidently reported that countries like South Korea and Indonesia, which have the opened economies, recorded considerable financial growth as compared to those states which borders are closed to the outside world. Therefore, all countries are encouraged to embrace financial globalization in order to benefit from the advantages that come with it and avoid economic slowdowns.
Evanoff, D. D., Hoelscher, D. S., & Kaufman, G. G. (2009). Globalization and systemic risk. Newcastle: World Scientific.