INTERNATIONAL RISK

CONSIDERATIONS
BY:JUSTIN MIGUEL INIEGO
 TYPES OF
INTERNATIONAL RISKS
•EXCHANGE RATE RISK
•POLITICAL RISK
 EXCHANGE RATE RISK

• It reflects the danger that an

expected change in the exchange
rate between the dollar and the
currency in which a project’s cash
flows are dominated will reduce the
market value of that project cash
flows.
 POLITICAL RISK

• The potential discontinuity or seizure of

a multinational corporation’s
operations in a host via the host’s
implementation of specific rules and
regulations
 OTHER SPECIAL ISSUES
AFFECTING INTERNATIONAL CAPITAL
BUDGETING

•TAXES
•TRANSFER PRICING
 TAXES

• Multinational companies unlike

domestic firms have a financial
obligations in foreign countries. One of
its basic responsibilities is international
taxation.
 TRANSFER PRICES

• Prices that subsidiaries charge each

other for the goods and services
traded between them.
RISK ADJUSTED DISCOUNT
RATES(RADRS)
DEFINITION OF THE RADR
• The rate of return that must be earned
on a given project to compensate the
firm’s owners adequately, that is to
maintain or improve the firms share
price.
 DETERMINING RADR
A popular approach for the risk adjustment involves
the use of the risk adjusted discount rate. This
approach illustrate the technique that uses the net
present value approach.
 DETERMINING RADR
• Sample Problem
Jea Tobias is considering investing $1000 in
either two of the stocks– A or B. She plans to hold the
stock for exactly 5 years and expects both stocks to
pay $80 in annual end-of-year cash dividends. At the
end of the year five she estimates both stocks can be
sold to net 1200. Jea has researched the two stocks
and feels that although stock A has average risk,
stock B is considerably riskier. Her research indicates
that she can earn an annual return of 11 percent on
an average stock. Because stock B is considerably
riskier she will require a 14 percent return from it.
 DETERMINING RADR
𝑁𝑃𝑉𝐴 =
1−(1+.11)−5
$80 + $1200(1 + .11)−5 - $1000= $7.81
.11

𝑁𝑃𝑉𝐵 =

1−(1+.14)−5
$80 + $1200(1 + .14)−5 - $1000= -$102.11
.14
 CAPITAL ASSET PRICING MODEL

Capital Asset Pricing Model

Linked the relevant risk and return for all assets
traded in efficient markets. CAPM define the total risk
as:

Total Risk= Nondiversifiable Risk + Diversifiable Risk

USING CAPM TO FIND RADRS
USING CAPM TO FIND RADRS