Currency Risk – Simply speaking the risk that occurs given the changes in price in one currency vs. another. This term is also known as exchange rate risk. A company could be said to have currency risk if they have significant assets or sales in one country/currency, but they report earnings in another country/currency. For example, if you are a US auto maker that reports income in $USD, but you also have a large portion of sales in China, you are exposed to currency risk.
Let’s say this company’s car in China sells for 65,200 Yuan in the beginning of the year. When the company reports this sale in USD, it shows a sale of $10,000 at that point in time (based on the exchange rates). However, let’s say the Chinese economy tanks and the value of the Yuan in relation to the dollar also tanks. So now, every car sold in for 65,200 Yuan is now only converting back to $USD at $9000. The company is making $1000 less on every sale because of the value of one currency vs. another. This company was exposed to currency risk because the value of a given sale was exposed to an exchange of currency which is constantly changing.
Economic Risk – It is the likelihood that an international investment will be affected by the political, social, or regulatory climate of the country invested in. This could include new government regulations, civil or external wars, political unrest, etc.
Translation Risk – Is similar to transaction risks, but it deals strictly when one company has to provide a valuation of their assets in one country into their home country’s currency. Therefore, the same risk exists in exchange rate fluctuations, but no actual monetary losses occur unless they sell in those currencies evaluated.
Transaction Risk – This is a form of exchange rate risk exists because of the time delay that occurs between the time of starting a contract and completing a contract in two different currencies. Over the time of a given contract, the actual relative value of the two monies in comparison to each other may have changed (Ex: Country A lends Country B 100 of Country A’s sheckles for one year. At this time these 100 sheckles were exchanged for 100 of Country B’s wampum. During the course of a year, however, these 100 sheckles lost value and were now only worth 50 wampum. Country B, though, is still contractually forced to pay the 100 wampum. Therefore, when country B pays back the 100 wampum they’ve basically paid back double what originally had expected because of valuation changes.
Federal Reserve – The central banking system of the U.S. that is arguably in charge of maintaining economic stability and growth. They lend massive sums of moneys to non-government banks to indirectly impact the interest rates of the country and the overall money supply. Their two biggest power levers are their ability to push or pull money into circulation, and the amount at which they charge banks to borrow.
Gross National Product (GNP) – The total value of all the goods and services produced within a country over a year, plus the income made by its citizens domestically and abroad. The figured does not count income made by non-citizens living in that country.
Inflation – This is the general rise in prices for goods and services in an economy (or country over time). Inflation is expressed best by the old saying, “back in my day a piece of candy was a nickel.” The price of candy has increased due to inflation, and not because of a growing scarcity of that product.
Gross Domestic Product (GDP) – Is the value of what a country produces in goods and services in a given time frame (usually a year.) This figure is often tied to standard of living metrics for a country. The higher the GDP, the higher the standard of living is considered – although this is not always the case. There is a formula for calculating this very powerful macroeconomic term, and it can be found below:
C = (Private) consumption, or non-governmental or business purchases
I = Investment, or business spending & investments in their operations
G = Government Spending
(X – M) = Net Exports, or exports minus imports. This may be a negative number
Foreign Direct Investment (FDI) – Direct investment by a company or individual in an operation or business in another country. This does not include buying stock in a given company abroad, but rather having a physical presence, a joint venture, or partnership with a company in the other country.
Foreign Corrupt Practices Act – An act created in 1977 that effectively makes it illegal for a U.S. Citizen, Company, or Foreign Company having a U.S. presence to engage in (U.S. regulated) corrupt acts abroad even if they are viewed as standard business practices in the other country.