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It is possible to use contracts to reduce the risk of adverse movements in the exchange rates of foreign
currencies. A company can enter into a contract to change a fixed amount of cash from one currency
to another at a certain price at a point in the future. It is possible to purchase an option to either buy or
sell currency at a specified price for a period of time. These tools allow companies flexibility but come
at a cost. Generally, their use requires experience and knowledge of this highly complex field. They
are beyond the scope of this chapter and may be a subject for future reading and research.
Summary
Global finance adds risk and return to corporations. The risks can be large if there is a major
movement in exchange rates or if political risk materializes in the form of an expropriation of assets or
a ban on repatriation of cash. Theory is of only moderate use, as practice often differs from what
theory would predict. On the positive side, expanding business to other countries offers great rewards
to the careful company.
Internet Links
For Further Reading
Gwartney, James, and Robert Lawson, Economic Freedom of the World: 2007 Annual Report
(Washington, DC: Cato Institute, 2007). The leading index of global economic freedom.
Part III
Business Entities
8
Choosing a Business Form
Richard P. Mandel