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Description of Arbitrage Profits Memo

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For your job as the business reporter for a local newspaper, you are given the assignment of putting together a series of articles on the multinational finance and the international currency markets for your readers. Much recent local press coverage has been given to losses in the foreign exchange markets by JGAR, a local firm that is the subsidiary of Daedlufetarg, a large German manufacturing firm. Your editor would like you to address several specific questions dealing with multinational finance. Prepare a response to the following memorandum from your editor:

TO: Business Reporter
FROM: Perry White, Editor, Daily Planet
RE: Upcoming Series on Multinational Finance
In your upcoming series on multinational finance, I would like to make sure you cover several specific points. In addition, before you begin this assignment, I want to make sure we are all reading from the same script, as accuracy has always been the cornerstone of the Daily Planet. I'd like a response to the following questions before we proceed:

1. What new problems and factors are encountered in international as opposed to domestic financial management?

2. What does the term arbitrage profits mean?

3. What can a firm do to reduce exchange risk?

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This solution-guide provides information regarding arbitrage profits in 900 words.

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In your upcoming series on multinational finance, I would like to make sure you cover several specific points. In addition, before you begin this assignment, I want to make sure we are all reading from the same script, as accuracy has always been the cornerstone of the Daily Planet. I'd like a response to the following questions before we proceed:

1. What new problems and factors are encountered in international as opposed to domestic financial management?

There are various problems and risks faced by the organization in the international markets. Organization has to face country risk. Country risk is a collection of risks associated with investing in a foreign country. These risks include political risk, exchange rate risk, economic risk, sovereign risk and transfer risk. (Investopedia, 2010) International diversification will reduce the unsystematic risk related to a particular country.

One of the prominent factors affecting country risk is the political factors. Political Risk is the risk that an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policy makers, or military control. (Investopedia, 2009) For example World is greatly affected by terrorism in the recent times. This may have adverse affect on the business. Organizations can be greatly affected by political instabilities of various economies in which it's operating. It has to manage the legislation and accessibility initiatives. Moreover it has ...

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