MANAGING RISK IN INTERNATIONAL BUSINESS

Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frMANAGING RISK IN INTERNATIONAL BUSINESSTechniques and ApplicationsEphraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frThe Three Steps to Effective International Risk ManagementIdentify the individual risksAssess risk magitudes and exposure levelsIncorporate the risk assessment in the decision making processEphraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frPolitical RiskDefinitionSourcesAssessment techniquesEphraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frModern Tools of Financial Decision MakingRequired input: MARKET DATA–Mean-variance analysis–Contingent claims analysis–Modigliani-MillerEphraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frShortcomings of Traditional TechniquesUnsuited to modern financial decision making–data –parameters–applicationsGenerally imprecise and difficult to applyEphraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frThe New Framework Overcomes These ShortcomingsUses market data (international prices)Generates parameters compatible with modern portfolio and option pricing theoryEphraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frGenerating the Data: Four StepsEstablish accounting disciplineDefine income flowsDefine expenditure flowsLink income and expenditure to the balance sheetEphraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frImportant New Decision Making ParametersMacroeconomic profitsMarket value of the economyThe economy’s rate of returnThe economy’s financial risk premiumThe economy’s systematic risk (beta)Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frAssessing Country Specific Financial RiskEstimate standard deviation of country rate of returnEstimate total amount of foreign debt and its durationApply the information in the Black-Scholes option pricing formulaEphraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frNew Parameters: ExamplesThe financial risk premiumInsolvency or illiquidityThe maximum debt levelImplied volatilityEphraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frA Big QuestionDOES IT WORK?Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frCLARK vs .EUROMONEYThe Forecast 1988The Clark forecast:Euromoney, September 1988, page 234–60 countriesThe EUROMONEY forecast: Euromoney, September 1988, page 235–117 countriesEphraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frCLARK vs. EUROMONEYThe Result 199300,20,40,60,81159131721252933374145495357Exhibit 6.9 -Percent of Unrescheduled Debt at Each RankClarkEuromoneyEphraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frEstimating Systematic RiskConstruct the World Index–Estimate macroeconomic market value for each country–Sum the market values of all countries to create the world indexRegress country returns against percentage change in world index to estimate BetaEphraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frPerformance MeasurementINTERNATIONAL PORTFOLIOSEphraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frMoney Market Portfolios1982-1991OptimizedGDP weightsEqual weightsJap-Ger-SwitzArithmetic.mean13%12%11.8%11.0%Geometricmean12.7%11.2%11.1%9.9%Standarddeviation7.5%13.3%12.4%15.7%Return/SD1.733%0.902%0.9520.701%Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frLong Term Government Bond Portfolios1982-1991OptimizedGDP weightsEqual weightsJap-Ger-SwitzArithmeticmean14%12.4%12.5%11.8%Geometricmean13.5%11.6%11.8%10.8%Standarddeviation11%13.2%13.2%15.7%Return/SD1.273%0.939%0.950%0.753%Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frEquity Portfolios1982-1991OptimizedEqual weightswith USEqual weightswithout USJap-Ger-SwitzArithmeticmean20.11%15.89%16.77%17.45%Geometricmean17.44%14.2%14.83%14.92%Standarddeviation25.56%20.64%22.08%25.85%Return/SD0.7868%0.76.99%0.7596%0.6750%Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frExcess Return to Risk for Selected Portfolios1982-1991OptimizedEqual WeightsJap-Ger-SwitzMoney market0.7000.3310.210LT govt. bond0.5670.3640.261Equity index0.4840.4090.375Source: E. Clark, “A general International market index”, International Journal of Finance,vol. 3, (1995) 1288-1312Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.frOutlineBrief review of traditional international risk analysisPresentation of new techniquesApplications–direct investment–portfolio investment–cross border loans