Final answer:
Global businesses can fund their operations through sources like early-stage investors, reinvesting profits, borrowing, and selling stock. They face exchange rate risks which include transaction risk, translation risk, and economic risk, impacting costs, financial reporting, and market value.
Step-by-step explanation:
Sources of Funds for Global Businesses
Global businesses can utilize various sources of funding to support their international operations. These include:
- Early-stage investors, who provide capital during the initial stages of business growth.
- Revenue generation by reinvesting profits from existing operations.
- Borrowing through banks or issuing bonds, which can provide substantial capital for expansion.
- Selling stock in public markets to raise funds and spread ownership among a broader group of investors.
Types of Exchange Rate Risks
Engaging in international trade exposes businesses to several types of exchange rate risks, such as:
- Transaction risk: Arises from the possibility of exchange rate fluctuations between the initiation and settlement of a contract, potentially affecting transaction costs.
- Translation risk: Occurs when consolidating financial statements from various countries, where differences in exchange rates can impact reported earnings.
- Economic risk: Involves the potential effect of currency value changes on a company's market value, considering shifts in competitive advantage due to exchange rate movements.
For example, a sharp appreciation of the home currency could make an export-focused business less competitive internationally. Conversely, a weak home currency might benefit importers but harm domestic companies competing with foreign imports.