Corporate Risk Management & Multinational Tax Management

Corporate Risk Management & Multinational Tax Management

-          Tata group case analysis

This blogger would analyse corporate risk management as Tata Group an example.

Theory introduction:

Risk Management

In the world of finance, risk management refers to the practice of identifying potential risks in advance, analysing them and taking precautionary steps to reduce/curb the risk.

Generally, interest rate and exchange rate risk management are considered significantly for international operating corporations.

There are two main risks (basis risk and gap exposure) are included in interest rate risk as well as 3 main risks (transaction risk, translation risk and economic risk) are included in exchange rate risk.

Basis risk

Basis risk is related to two floating rates which are not determined using the same basis.

Transaction Exposure

Transaction exposure is the risk that the amount of domestic currency either paid or received in these foreign currency transactions may change due to movements in the exchange rate.

Translation Exposure

Translation exposure refers to the possibility that, as a result of the translation of overseas assets, liabilities and profits into the domestic currency, the holding company may experience a loss or a gain due to exchange rate movements.




Economic Exposures

Economic exposure refers to the risk of long-term movements in exchange rates undermining the international competitiveness of a company or reducing the net present value of its business operations.

It should be mentioned that, economic risk is a more general type of exchange rate risk than transaction and translation risk.



Tata Group Case Analysis:

Related Corporations brief introduction

Tata group:

Jaguar Land Rover:

Tata group bought Jaguar Land Rover Case:

 As an Indian based corporation, Tata group acquiried Jaguar Land Rover (a British corporation) is belong to international acquisition. With different culture and national location of two corporations, Tata group would get exchange risk. For example, Tata group would get some transaction risk during the acquisition payment period. After acquisition, as the parent corporation of Jaguar Land Rover, Tata group would get translation exposure when recieving and chekcing the financial statement of Jaguar Land Rover every year. Moreover, as exchange floating frequently by some global events, Tata group would get economic exposures and should justify Jaguar Land Rover predicting profit under global trend consideration. For example, as America reducing quantitative easing policy, both India and UK would have effect on that. However, as the decreasing of quantitative easing leading emerging economy capital price decreasing, the emerging country India would get huge negative exchange impact from quantitative easing policy draw back and Indian Rupee rapidly and extremely depreciation. While UK does not get much impact on that policy for its better capital structure and national economy revive. Then, Indian Rupee is depreciating by comparing British Pound in this period. Therefore, for Tata Group, it is better to consider the influence of quantitative easing policy by comparing with two countries specific influence and deduct the predict of Jaguar Land Rover, such as Jaguar Land Rover may have better gainning than Tata Group other corporations in India. Except considering global events influence, Tata Group could make specific exchange strategy to control the risk.





Bibliography:

The Economic Times,. (n.d.). Risk Management Definition | Risk Management Meaning - The Economic Times. Retrieved 20 February 2014, from http://economictimes.indiatimes.com/definition/risk-management

Watson, D., & Head, A. (2007). Corporate finance (1st ed.). New York, NY: Financial Times/Prentice Hall.

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