Important Operational and Financial Risks in the Arrangement
Geromichalos & Jung (2018) argued that operational risks are losses incurred by businesses due to the failure of internal business processes. In the case of the U.S wood-products company, operational risks could include fraud enhanced by employees and managers in the United States because they are dealing with the daily sale of wood and products.
Because the U.S wood-products company mainly deals with woods and products, its raw materials in Canada would be trees. Excessive deforestation without afforestation strategies will ultimately lead to desertification, climate change, flooding, soil erosion, and increased emission of greenhouse gases into the atmosphere in Canada in the long run.
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Financial risk is the ultimate of businesses losing money in certain business ventures (Geromichalos and Jung, 2018). Ideally, the U.S wood-products company will be paying employees, suppliers, and other business stakeholders using the U.S Dollar and Canadian Dollar. This may lead to foreign exchange (FOREX) risk because currencies often fluctuate due to economic conditions.
The U.S wood-products company could militate against the FOREX risk by implementing hedging strategies like currency futures and forwards (Geromichalos and Jung, 2018). Furthermore, currency risks can be eliminated by the company maximizing hedging traded funds available in the money market.
How the Company Can Pay In U.S Dollars and Canadian Dollars
Most banks in Canada and United States convert automatically currencies that are preferred by employees and other stakeholders of the wood-products company. For example, the company will calculate employee salary in Canadian currency, and then it pays via Real-time-gross-settlement system (RTGS) or Electronic Fund Transfer (EFT). After which the Canadian employees will withdraw Canadian Dollars from their banks.
In calculating its profits in terms of the U.S Dollar, the company will have to convert the Canadian Dollar into the U.S Dollar. Currently, 1 U.S Dollar equals 1.24 Canadian Dollars (Geromichalos and Jung, 2018). For example, if the company has made 100,000 Canadian Dollars in profits, it will translate to 80,670 U.S Dollars.
References
Geromichalos, A., & Jung, K. M. (2018). An Over ‐ the ‐ Counter Approach to the FOREX Market. International Economic Review , 59 (2), 859-905.
