Diversity and growth are two major reasons people invest in the foreign market and procure investment with international exposure.
Diversity in international investing assists investors spread their investment risk among foreign companies and markets in addition to internal companies and markets. International investing takes advantage of the potential for growth in some foreign economies, particularly new developing markets.
When an organization engages in international financing activities, it takes on additional risk, risk that already comes with investment and other opportunities. These challenges may sometimes make it difficult for companies to maintain constant and reliable revenue.
The main risks that are associated with businesses engaging in international investment include;
Foreign Exchange Risk
Foreign exchange risk occurs when the value of an investment fluctuates due to changes in a currency’s exchange rate.
Foreign exchange risk is also known as FX, currency, and exchange-rate risk. When a domestic currency appreciates against a foreign currency, profit or returns earned in the foreign country will decrease after being exchanged back to the domestic currency.
Due to the somewhat volatile nature of the exchange rate, it can be quite difficult to protect against this kind of risk, which can harm sales and revenues.
Political Risk
Geopolitical risk, also known as political risk, transpires when a country’s government unexpectedly changes its policies, negatively affecting the foreign company.
These policy changes can include such things as trade barriers, which serve to limit or prevent international trade.
Some governments will request additional funds or tariffs in exchange for the right to export items into their country. Tariffs and quotas are used to protect domestic producers from foreign competition.
This also can considerably affect an organization’s profits because it either cuts revenues from a tax on exports or restricts the number of revenues that can be earned.
Interest Rate Risk
This risk consists of unfavorable changes to monetary policy. For instance, an emerging market economy may decide that it is growing too quickly and act to contain inflation by hiking interest rates.
These dynamics could harm the value of financial assets priced based on those interest rates. (Example of risk from websites; https://www.thebalance.com/what-is-global-investment-risk-4148455
https://www.investor.gov/introduction-investing/investing-basics/investment-products/international-investing)
Organizations engaging in international finance activities can experience much more significant uncertainty in their revenues, hence why they need financial policy protection.
Despite the negative exposures above, international business can open up opportunities for reduced resource costs and larger lucrative markets. There are also ways in which a company can overcome some of these risk exposures.
For example, hedging. Hedging is a strategy used to protect one’s position in a currency pair from an adverse move. It is typically short-term protection when a trader is concerned about news or an event triggering volatility in currency markets.
These hedges aim to reduce the risk that price movements in the currency market will adversely affect the company’s revenue and profits.
But we still ask the question, is Global Investing Worth the Risk? Yes.
Global investment helps lower average profile volatility over the long term. In the short term, investors can also participate in whichever regional market outperforms, allowing diversity and exposure within an investment.
