Coursework Assignment 1 Answer Template

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Joint Venture Risk Analysis
Joint Ventures is actually a way to combine the resources and expertise of the two different
companies which is actually based on the risk sharing methodologies and overall profit or
loss of the firm. There are actually certain advantages and disadvantages of the risk
associated with joint ventures. Based on the financial relationship among the ELD and FIH,
the joint venture is actually termed as an international joint venture dealing with certain risk
in the business. Based on the financial performance and analysis of both the company it will
be better to go ahead with the proposition placed forth by FIH for joint venture partnership.
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Coursework assignment 1 answer template997Both ELD and FIH is involved in the expansion growth by ascertaining good returns despite
of the significant business obstacles which the company will face from the day of
commencement of such business. The proposition of joint venture will automatically enhance
the overall performance of the two companies in terms of risk and reward sharing strategies.
The maximum return is particularly based on the time based investments and monetary
terms of each entities of the business.
Following are the four identified risks with the acceptance of the joint venture proposal:
1. Management Risk
2. Political and Economic Risk
3. Default Risk
4. Exchange Risk
The risk have been defined accordingly based on the joint venture proposition of the two firm
which are the FIH and ELD in the region of UK. It is actually designed to understand the
significance of the risk management framework and to understand the effective strategies of
the management and the risk exposure associated with.
Management Risk
Management risk of the company is related to the internal risk factors of the business which
is dealt by the internal management. The clash actually takes place among the management
styles and cultural factors. Both the companies objectives must be same and significant risk
and return are also related to the venture. The clashes is further among the workspaces of
the management styles and the business carried out by the entire business entity. The
difference will further lead to the viability of the joint venture and the risk partnership before
the maturity of the business.
For ELD, there are certain risk which are associated with the management which actually
deals with the huge differences of the UK-Us practices and it is correctly implemented. It is
further related to the bottleneck based on the projected progress of the company. The
management have to make sure that there is effective communication and understanding in
the development of the business in each and every perspective. The critical decisions which
are taken by the management by analysing and interpreting the results of the same.
Political and Economic Risk
The political and the social risk are particularly based on the environmental factors of the
actually means that this kind of risk may put a dent in the joint venture of FIH and ELD. The
economic slowdown is another risk which may take place due to the shrink in the market. In
such a situation there may be a financial struggle in the business where the upper level
management of the firm must take care of such major fluctuations in the business process of
the venture. The financial fluctuation might take place due to such changes in the political
and economic factors of the firm.
Default Risk
The default risk is regarding the bankrupt of the company which is a unlikely situation may
take place in the near future due to the negligence in the management system of the firm.
Competitive bargaining power will further help the business to sustain in the long run and it
will become quite unlikely that in the future the winding up or dissolution of the company may
happen. As per the reports it is found that the financial performance of FIH is enhancing
accordingly. But since the incorporation of the company, the profit of FIH is not disclosed.
The situation in that case must be analysed by the upper level management of the firm with
the help of detailed investigation. However, the situation can be assessed at a higher-level
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Coursework assignment 1 answer template997as requiring further investigation. Thus, the default risk is more pertinent and would require
effective mitigation tactic to hedge against it, provided the company chooses to go through
with the joint venture. Insurance and similar alternative hedging products can allow for
reduced exposure to the default risk caused due to partaking in the joint venture. ELD is
currently heavily insured and therefore, can look into moving ahead with this decision of
initiating a joint venture. It is recommended, however, to assess and include more financial
products for international businesses and related risk and insurance.
Exchange Risk
Lastly, a major risk that international businesses are prone to be exchange risk. It is also one
of the significant aspect which is related to the political and economic factors. The currency
exchange rate will definitely create impact during the projection of the budget and forecasted
sales of the company. It will also create impact in the profitability position and the other
parameters associated with it. There actually is a positive or rather strong relation among the
both the countries which are the US and UK. This also creates impact on the significant
fluctuation in the exchange rates of the company and the risk associated in that case will be
less if the relationship among the two countries is effective. Suppose in terms to current
situation there is a significant drop in UK pounds which is quite observed in the referendum
of Brexit which happened in the year 2016. Further the implementation of the various
financial instruments will also help the firm to evaluate the exchange risk involved in that
case.
Three Risk Financing Solutions
Each of the suggested risk exposure would require a certain amount of risk financing. Risk
financing refers to the accumulation and allocation of funds to mitigate the risks, in this case,
of proceeding with the joint venture with an international company situated in another
continent. Following are the three suggested risk financing solutions that are suggested for
each of the above-mentioned risk exposure after analysis through the four T's framework of
risk management, as briefly discussed alongside each of the financing solutions.
1. Insurance
2. Derivatives
3. Do Nothing
Each of the risk financing solutions is discussed below with the intent to understand the
particular risk it targets to resolves, following its strategy used based on the T's of the risk
management framework.
Insurance
As per the reports it is obtained that ELD is currently linked with heavy insurance based on a
moderate low risk. Insurance is the ultimate banking solution in finance and there are certain
risk associated with the financing method of the business. There are also certain exposure
related to risk and insurance products which actually requires payment of premium actually
made by ELD. The framework which is related to the risk management takes place by the
help of the transfer techniques which is employed by sharing associated with the failure of
FIH. ELD can appeal FIH to take a larger share in the risk mitigation tactic, considering the
company would be operating in its locality. Through similar streams protracted as an
insurance product, the same can be employed with the joint venture risk sharing or transfer
technique. This methodology will tackle the management and default risk of the four risk
exposures of the ELD company.
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