What is capital budgeting? What types of risks are involved? How can an MNE manage these risks?

What will be an ideal response?

When making a capital budgeting decision, the MNE determines which projects and countries will receive its capital investment funds. The parent company must compare the net present value or internal rate of return of a potential foreign project with that of its other projects around the world to determine the best place to invest resources. The technique used to compare different projects is called capital budgeting. If all exchange rates were fixed in relation to one another, there would be no foreign-exchange risk. However, rates are not fixed, and currency values change frequently. Instead of infrequent, one-way changes, currencies fluctuate often and both up and down. A change in the exchange rate can result in three different exposures for a company: translation exposure, transaction exposure, and economic or operational exposure. To protect assets adequately against risks from translation, transaction, and economic exposure of exchange rate fluctuations, management must:
a. define and measure exposure
b. organize and implement a reporting system that monitors exposure and exchange-rate movements
c. adopt a policy assigning responsibility for minimizing exposure
d. formulate strategies for hedging exposure