Global Financial Investment Globalization Has Thesis

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The success rates of this venture are increased as investors are willing to risk their money in the hope of increased gains. Otherwise put, shareholders "can accept downside risks because they fully share the upside as well" (Dynamic Equity, 2002). Regardless of the sources used in contracting the necessary money, the organization would still have to retrieve a minimum of $40 million revenues during the first year in order to be profitable.

7. Exchange Rate Risk

Some managers at the Wilson Company argued that the organization should contract its loans in Renminbi, or the Chinese currency. The measure would, according to them, help the company protect itself against currency exchange risks. Considering that the company comes to disregard this suggestion, the situation would present itself as follows:

the exchange rate is of one RM to 0.2 USD, meaning basically that a United States dollar can be purchased for 5 Renminbis

the failure to protect against currency risks is similar to speculative actions in the meaning that it can materialize in both gains as well as loses; however, the two are mutually exclusive meaning that only one trend can be observed for a given venture

in this order of ideas, if the Chinese Renminbi suffers a process of devaluation, it becomes less able to purchase United States dollars; consequently, this means that Wilson registers financial gains as its national currency has become stronger in comparison to the local one and that a U.S. dollar is able to purchase more Chinese RMs

secondly, if the Chinese RMs become stronger, the same amount of Chinese currency is able to purchase larger amounts of American currency; consequently, this means that the Wilson Company is subjected to financial losses due to a devaluation of the American dollar in comparison to the Chinese Renminbi

With these considerations in mind, the managerial team at the United States-based organization has to make a decision.

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The ultimate course of action will depend directly on the company's risk aversion. Otherwise put, they will have to compare their desire for positive gains against the possibility of losses. If the desire for gains is strong and the aversion to risk is low, the company will chose not to hedge against currency risks. If on the other hand the aversion to risk is high and outweighs the possibility of easy gains, the managers at the Wilson Company will choose to protect themselves against currency risks and a means of achieving this is that of borrowing also in Chinese Renminbis instead of just American dollars. This measure will ensure that the company is not affected by fluctuations in the Chinese currency (Hull, 2003).

8. Conclusions

The growing forces of globalization and market liberalization motivate more and more economic agents to expand their operations to other geographic regions. China is a popular destination for many American organizations due to the comparative advantages it offers, such as cost effective labor force or an abundance of technological innovations. The U.S.-based Winston Company is currently assessing the possibility of a joint venture with a company in China to produce and sell videocassettes. A financial analysis of the business proposition reveals that it stands increased chances of success, and that it would manage to retrieve the desired rates of return given that the managerial teams are able to develop and implement the adequate courses of action......

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