Financial Risk in International Business by spx11901

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									            MANAGING RISK IN
        INTERNATIONAL BUSINESS
                          Techniques and Applications




Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
           The Three Steps to Effective
                International Risk
                  Management

                     Identifythe individual risks
                     Assess risk magitudes and exposure
                      levels
                     Incorporate the risk assessment in the
                      decision making process


Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
                                     Political Risk

                  Definition
                  Sources
                  Assessment techniques




Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
               Modern Tools of Financial
                  Decision Making

                                     Required input:
                                          MARKET DATA
                                           – Mean-variance analysis
                                           – Contingent claims analysis
                                           – Modigliani-Miller



Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
             Shortcomings of Traditional
                    Techniques
                                     Unsuited to   modern financial
                                         decision making
                                          – data
                                          – parameters
                                          – applications
                                     Generally imprecise and
                                         difficult to apply

Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
                        The New Framework
                         Overcomes These
                           Shortcomings
                                     Uses market data (international
                                      prices)
                                     Generates parameters compatible
                                      with modern portfolio and option
                                      pricing theory




Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
                        Generating the Data:
                            Four Steps

        Establish accounting discipline
        Define income flows
        Define expenditure flows
        Link income and expenditure to the balance
         sheet


Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
                   Important 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.fr
    Assessing 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 formula

Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
            New Parameters: Examples
        The financial risk premium
        Insolvency or illiquidity
        The maximum debt level
        Implied volatility




Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
                            A Big Question

                    DOES IT WORK?


Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
                         CLARK vs         .
                              EUROMONEY
                         The Forecast 1988
        The    Clark forecast: Euromoney, September
            1988, page 234
              – 60 countries
        The    EUROMONEY forecast: Euromoney,
            September 1988, page 235
              – 117 countries


Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
              CLARK vs. EUROMONEY
                 The Result 1993
                 Exhibit 6.9 - Percent of Unrescheduled Debt at Each
                                                   Rank

                                                       1

                                                     0,8                  Clark
                                                     0,6

                                                     0,4

                                                     0,2
                                                             Euromoney
                                                       0
                  1    5    9   13 17 21 25 29 33 37 41 45 49 53 57




Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
                 Estimating 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 Beta

Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
             Performance Measurement

                 INTERNATIONAL
                   PORTFOLIOS

Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
                  Money Market Portfolios
                       1982-1991
                            Optimized            GDP weights          Equal weights       Jap-Ger-Switz


       Arithmetic.                 13%                  12%                 11.8%               11.0%
       mean

       Geometric                  12.7%                11.2%                11.1%                9.9%
       mean

       Standard                    7.5%                13.3%                12.4%               15.7%
       deviation

       Return/SD                 1.733%               0.902%                0.952               0.701%




Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
         Long Term Government Bond
                  Portfolios
                 1982-1991
                            Optimized            GDP weights          Equal weights       Jap-Ger-Switz


       Arithmetic                  14%                 12.4%                12.5%               11.8%
       mean

       Geometric                  13.5%                11.6%                11.8%               10.8%
       mean

       Standard                    11%                 13.2%                13.2%               15.7%
       deviation

       Return/SD                 1.273%               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.fr
                               Equity Portfolios
                                 1982-1991
                            Optimized            Equal weights        Equal weights       Jap-Ger-Switz
                                                 with US              without US

       Arithmetic                20.11%               15.89%               16.77%               17.45%
       mean

       Geometric                 17.44%                14.2%               14.83%               14.92%
       mean

       Standard                  25.56%               20.64%               22.08%               25.85%
       deviation

       Return/SD                 0.7868%             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.fr
               Excess Return to Risk for
                  Selected Portfolios
                      1982-1991
                                 Optimized                 Equal Weights             Jap-Ger-Switz


       Money market                       0.700                     0.331                     0.210


       LT govt. bond                      0.567                     0.364                     0.261


       Equity index                       0.484                     0.409                     0.375


       Source: E. Clark, “A general International market index”, International Journal of Finance,
       vol. 3, (1995) 1288-1312



Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr
                                              Outline
        Briefreview of traditional international risk
         analysis
        Presentation of new techniques
        Applications
              – direct investment
              – portfolio investment
              – cross border loans


Ephraim CLARK, 43 rue Louis Rouquier, 92300 Levallois-Perret, France, Tel: 33-1-47-57-72-34. eclark@club-internet.fr

								
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