1. ©2012 McGraw-Hill Ryerson Limited 1 of 30 Learning Objectives 1.Identify reasons for a foreign investment decision (later analyze). (LO1) 2.Examine the effects of exchange and political risk on the foreign investment decision. (LO2) 3.Assess the effects of exchange rates on the firm’s profitability and cash flow. (LO3)

2. ©2012 McGraw-Hill Ryerson Limited 2 of 30 Exchange Rate Exposure Exposure refers to the possible change in value of foreign exchange rates. Types of Foreign Exchange Risk: 1. Economic Exposure:  the market value of foreign currency-denominated assets and liabilities is subject to change 2. Accounting or Translation Exposure  the amount of loss or gain resulting from the accounting treatment of foreign investments 3. Transaction Exposure  the foreign exchange gains or losses resulting from realized international transactions LO3

3. ©2012 McGraw-Hill Ryerson Limited 3 of 30 Political Risk In addition to exposure, political risk needs to be evaluated before investing –Governments may change several times during the firm foreign tenure –Unfriendly governments may impose foreign exchange restrictions –Transfer of subsidiary’s profit may be blocked –Government may take over foreign subsidiary’s assets LO3