An assignment

on

Risk Management in International Business with Special

Reference to Bangladesh

By
Farjana Hoq 14164003

Submitted to
Dr. Shah Md. Ahsan Habib
Professor & Director (Training), BIBM

June 8, 2016

A1. Introduction
Together with technological advances in areas of communication and transportation,
among others, international business have been developed tremendously. The gap between foreign and domestic investing has become thinner & thinner day by day.
However, investing in foreign markets leads to additional risks, as well as opportunities,
in comparison with what investor/s normally face/s when investing at home-ground. The
research study that I presented in this assignment report addresses these risks in international business with special references to Bangladesh and discusses risk management
methodologies for confronting them.

A2. Goals
The report focused on analysing the following concerning topics as listed below:
Discussing the theoretical aspect of risks and techniques of risk management in
international business
Literature reviewing and discussing the risk management tools of Bangladesh

A3. Risk Management Techniques in International Business

The most concerning issue can be underlined in risk management is to identify the risks.
Here, the non-trivial risks are classified into three categories, namely, Foreign Currency
Exchange Risk, Commodity price risk and Interest rate risk. The highlighted strategies
for foreign currency exchange risk management are briefly presented below:

A3.1. Foreign Currency Exchange Risk/Currency Risk

Foreign currency exchange risk also name as exchange rate risk. Generally speaking, it
is a financial risk created by an exposure to unanticipated changes in the exchange rate
between two currencies. Say, if someone wishes to mitigate and/or eliminate exchange
risk, he/she might need to posses an option to select the billing and pricing currency,
consider his/her national currency to conduct the business. However many companies
may not have this option. If not, then a margin buffer need to:
- top-up to any invoice quoted in a foreign currency, or
- create a contract by which the buyer and seller share the risk of significant fluctuations
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in foreign exchange rates between the time the invoice is generated and the date on
which the payment is made.
The Forex-Market is considered to be the largest financial market in the world. In
Forex-Market a firm can participate as: Arbitrator, Hedger and Speculator.
Products of Foreign Exchange Market:
Foreign Currency Forward
In the forward contract, the amount of the transaction, the delivery date, and the exchange rate are all tailored in advance, no exchange of money takes place until the actual
settlement date. The two parties in the contract have the obligation to buy and sell in
foreign currency. Foreign exchange forward contract is a way of locking in the foreign
exchange rate.
Currency Future
A currency future, also FX future or foreign exchange future, is a futures contract to
exchange one currency for another at a specified date in the future at a price (exchange
rate) that is fixed on the purchase date; see Foreign exchange derivative. Typically, one
of the currencies is the US dollar. The price of a future is then in terms of US dollars
per unit of other currency. This can be different from the standard way of quoting in the
spot foreign exchange markets. The trade unit of each contract is then a certain amount
of other currency, for instance EUR 125,000. Most contracts have physical delivery, so
for those held at the end of the last trading day, actual payments are made in each
currency. However, most contracts are closed out before that. Investors can close out
the contract at any time prior to the contracts delivery date.
Currency Option
A currency option is a contract that allows the contract holder (but not the obligation)
to buy or sell the currency at an agreed price on or before a specified date. American
options permit the holder to practice the option any time before the expiration date.
In contrast, European options only permit the exercise of the option at the expiration
date. The main advantage of currency option is that the holder does not have to buy the
foreign currency in the agreed price in the contract when the market foreign currency
exchange rate is lower than the agreed price. However, it is worth to note here is that,
the cost of buying the options is much higher than forwards and futures.
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Currency Swap
A currency swap involves exchanging principal and fixed rate interest payments on a
loan in one currency for principal and fixed rate interest payments on an equal loan in
another currency. Just like interest rate swaps, the currency swaps are also motivated
by comparative advantage. Currency swaps entail swapping both principal and interest
between the parties, with the cash flows in one direction being in a different currency than
those in the opposite direction. It is also a very crucial uniform pattern in individuals
and customers.

A3.2. Commodity Price Risk

The threat that a change in the price of a production input will adversely impact a
producer who uses that input. Commodity production inputs include raw materials
like cotton, corn, wheat, oil, sugar, soybeans, Copper (Cu), Aluminium (Al) and steel.
Factors that can affect commodity prices include political and regulatory changes, seasonal variations, weather, technology and market conditions. Unexpected changes in
commodity prices can reduce a producers profit margin, and make budgeting difficult.
Fortunately, producers can protect themselves from fluctuations in commodity prices by
implementing financial strategies that will guarantee a commoditys price (to minimize
uncertainty) or lock in a worst-case-scenario price (to minimize potential losses). Future,
option and swap are three financial instruments used to hedge against commodity price
risk
Commodity Futures Contract
An agreement to buy or sell a set amount of a commodity at a predetermined price and
date. Buyers use these to avoid the risks associated with the price fluctuations of the
product or raw material, while sellers try to lock in a price for their products. Like in all
financial markets, others use such contracts to gamble on price movements. Trading in
commodity futures contracts can be very risky for the inexperienced. One cause of this
risk is the high amount of leverage generally involved in holding futures contracts. For
example, for an initial margin of $5,000, an investor can enter into a futures contract for
1,000 barrels of oil valued at $50,000. Given this large amount of leverage, even a very
small move in the price of a commodity could result in large gains or losses compared
to the initial margin. Unlike options, futures are the obligation of the purchase or sale
of the underlying asset.

Commodity option
A commodity option gives the buyer the right but not the obligation to buy or sell a
certain quantity of that commodity at a particular price after a particular period of time.
These futures and options can in turn, be traded on secondary markets. For example:
one might buy a future from a trader on the CBOT (a Commodity exchange) which
gives me the right but not the obligation to sell 2 bushels of wheat on 11th December,
2008 at $1230 per bushel.
Commodity Swap
A swap in which exchanged cash flows are dependent on the price of an underlying
commodity. A commodity swap is usually used to hedge against the price of a commodity.
The vast majority of commodity swaps involve oil. So, for example, a company that uses
a lot of oil might use a commodity swap to secure a maximum price for oil. In return,
the company receives payments based on their market price. On the other side, if a
producer of oil wishes to fix its income, it would agree to pay the market price to a
financial institution in return for receiving fixed payments for the commodity.

A3.3. Interest Rate Risk

Interest rate risk exists in an interest-bearing asset, such as a loan or a bond, due to the
possibility of a change in the assets value resulting from the variability of interest rates.
Interest rate risk management has become very important, and assorted instruments
have been developed to deal with interest rate risk. This article introduces you to ways
that both businesses and consumers manage interest rate risk using various interest rate
derivative instruments.
Forwards
A forward contract is the most basic interest rate management product. The idea is
simple, and many other products discussed in this article are based on this idea of an
agreement today for an exchange of something at a specific future date.
Futures
A futures contract is similar to a forward, but it provides the counter-parties with less
risk than a forward contract, namely a lessening of default and liquidity risk due to the
inclusion of an intermediary.

Swaps
Just like it sounds, a swap is an exchange. More specifically, an interest rate swap looks
a lot like a combination of FRAs and involves an agreement between counterparties to
exchange sets of future cash flows. The most common type of interest rate swap is a
plain vanilla swap, which involves one party paying a fixed interest rate and receiving a
floating rate, and the other party paying a floating rate and receiving a fixed rate.
Options
Interest rate management options are option contracts for which underlying security is
a debt obligation. These instruments are useful in protecting the parties involved in a
floating-rate loan, such as adjustable-rate mortgages (ARMs). A grouping of interest
rate calls is referred to as an interest rate cap; a combination of interest rate puts is
referred to as an interest rate floor. In general, a cap is like a call and a floor is like a
put.

A4. Risk Management Tools in Bangladesh Compare to

The International Market
Bangladesh has been becoming an important body member in international trade. The
Bangladesh market is getting bigger and bigger, and now has reached into a stage that
can able to draw attention from any international company; say for example: biggest
exporting sector RMG mostly depend on the foreign supplier. Similar like foreigner
as well as Bangladeshi, who are engage in international trade for foreign exchange and
commodity price risk, should keep in mind about the risk management tools.
In Bangladesh, Forward Booking, Option and Swap are allowed but no future market has been established so far for the traders. It can be used for the minimization of
foreign exchange risk as well as commodities price risk. Forward can be used forward
but which is not a formal market tools so it doesnt encourage Bangladeshi importer
and exporter. Therefore the use of forward booking in Bangladesh is very low. It seems
very important to establish future market. This is a very new concept for almost all
of the people of our country. Due to this there is a few numbers of professionals and
expertise in here. Lots of professionals who can design and control the market will be
needed. But number of researchers and number of graduates we are having regarding
this subject from our universities and institutions who can work for this kind of project

is very few in Bangladesh. Professionals and expert people from the overseas countries
are needed which is expensive in order to establish a Future and Forward Market. In
our country investors are not that much educated who can understand Future Market
scenarios and activities. It will take time to get educated or understand the market. At
this time a group of people might want to enjoy extra benefit which is unwanted.
Whereas a future market needs a strong number of investors whose investment will
run the market and keep it alive seems very difficult in Bangladesh because as a developing nation we do not have enough investors who are having bulk amount of monetary
reserve. Bangladesh is currently lacking off investors. In the Future and Forward Market, when investors are doing their business there is some risk about the quality of their
underlining product in Bangladesh.
There is no commodity exchange for agricultural products in Bangladesh. A common
argument always arise that the prices of agricultural produce are very high at trade level
in markets. Common charge against middlemen and businessmen concerned in process
of making these products on hand to the consumers in the cities. The marketing chain
for farm products in Bangladesh is highly bitty. Market group of actors include local
collectors, local traders, local market wholesalers and their agents, urban wholesalers
and their commission agents, rural and urban retailers. Many of these operate on a
very small scale. Crops such as paddy, red chili, and vegetables are either collected by
commission agents from the producers and take the products to sell directly in nearby
markets. Wholesalers purchase from rural markets through agents and send the produce
to the commission agents in big urban wholesale markets, or sell to processors. The
commission agents earned a bad name in the society. Commission agents are traders
who buy directly from the growers and sell to other traders or to the local markets.
They are mostly small-scale seasonal floating traders, and some combine farming with
trading. Small scale wholesalers is there who collect products from small markets and
send them to big markets, or sell to near-by big wholesalers. Rural assemblers are
there who collect from growers or local markets and export to wholesale-cum retail
markets or distant urban wholesale markets. Wholesalers are permanent shopkeepers
and commission agents having their own premises in the city markets. Wholesalers are
the middle functionary between commission agents and retailers. Commissions are taken
by them from both the parties.. There is another group of traders mostly offer Dadon
- cash as loans to producers in return for the produce at a pre-fixed price, This is called
the futures market. Retailers are traders catering to need of the customers. They buy

products from the Wholesalers and sell directly to the consumers. Urban wholesale
markets are specialized markets operating for a particular line of products. (e.g. rice,
vegetable and fruits). These markets bridge the gap between distant wholesalers and
large number of retailers. Commission agents provide services in these markets. There
are some wholesale markets in Dhaka. Due to absence of Commodities Exchange Product
price become high due to so many intermediaries. As a result producers are not getting
the actual price as well as consumer also paying high price for the products.

A5. Conclusion
There have been few non-trivial risk management methodologies developed so far in
Bangladesh. However, the employment of these techniques by the Bangladeshi trader
are not that vibrant. Thereby, it is worth to take some initiatives by government that can
help to grow interest between traders to adopt these well-developed mechanism as well as
to establish future market in Bangladesh. Since the highest percentage of labor force are
engaged in agricultural based sector, agricultural product commodities exchange should
be underlined. Moreover, it also accelerate producer to get some financial help from
different financial institutions. Use of the mechanism that already Like well established
technology in Bangladesh - Forward Booking - and if future market and commodities
exchange can also be establish then exporter and importer of Bangladesh can have more
facilities to reduce their risks arise from foreign exchange and commodities price risk.

References
[1] Ian H. Giddy and Gunter Dufey, The Management of Foreign Exchange Risk from
New York University and University of Michigan
[2] from Wikipedia: [Option (finance); Futures contract; Forward contract; Swap (finance)]