Country Risk Analysis

Country Risk Analysis - RISK Running Head: COUNTRY RISK...

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RISK 1 Running Head: COUNTRY RISK ANALYSIS Country Risk Analysis University of Phoenix
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RISK 2 Now that PepsiCo has made the decision to enter the Brazilian marketplace, the next, and arguably most important step is the analysis of risk factors. When an organization begins operations in a new domestic market, many new risk variables present themselves. While these new risks are real, the operation is still within the same country, government, domestic economy, and federal laws, with the regulation differences varying from state to state. This decision to move to a new country now presents a new set of risks that are in conjunction with the basis risks involved in opening a new organization or a new division of an existing organization in a new territory. PepsiCo can use a variety of analysis techniques, including the Delphi technique, sensitivity analysis, checklist approach, and standard deviation of cash flows to perform a quantitative analysis, and compare these results using both qualitative and quantitative techniques, which include forward market hedge, money market hedge, and options. Factors such as economic exposure, translation exposure, transaction exposure, political considerations, socio-economic, and environmental issues all must be included in a full risk assessment prior to PepsiCo setting up operations in Brazil. Economic Exposure Economic exposure is a main risk factor that any organization must recognize and assess when preparing to enter a new global market. Economic exposure represents the change in value of operations, measured by the present value of expected future cash flows, when exchange rates change. Since all future exchange rate changes are uncertain, fluctuations in currency rates can change the variability or expected amounts of PepsiCo's future cash flows. Basically, operations in Brazil will begin with today’s exchange rate, and the cost involved is clearly defined. As PepsiCo continues conducting business over a future period of time, chances are that the exchange rate will have changed, and the cost of conducting business will have become more or
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RISK 3 less expensive based solely upon these rate changes. For example, today’s exchange rate is 1 Brazilian Real to $0.44. So, if the cost of operations is defined at 1 Real per unit today, 10,000 units would cost PepsiCo $44,000. Three months from now, if the exchange rate were to be 1 Real to $0.55, representing a 20% increase in the value of local currency, the cost in dollars to PepsiCo for the same operations would now be $55,000, which is an increase of $11,000 for nothing more than a change in the exchange rate. Translation Exposure The global economic environment exposes multinational companies to many risks that are unique to the region of the world that is targeted. In addition to these unique risks that are characteristic of the country or region that is entered into, there are other risks that are relatively common for all multinational corporations. Among the more common risks is translation
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This note was uploaded on 08/17/2011 for the course BUS 200 taught by Professor Torres during the Spring '11 term at University of Phoenix.

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Country Risk Analysis - RISK Running Head: COUNTRY RISK...

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