By Jack D. Glen
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Additional resources for How firms in developing countries manage risk, Part 63
As a result, the interest rate earned on medium-term notes is below the firm's cost of funding. With no secondary market in which to liquidate the notes, the company has incurred a loss of approximately $100 million, nearly 70 percent of the company's equity. Like financial variables, commodity price movements can be ruinous to producers and users alike. The ease of a Caribbean cotton growing project provides an illustration. At the time the project was proposed, international cotton prices were near an historic low.
5%. 5%. 5%. The extent to which a variable can move away from its starting point is measured by volatility. As the example shows, the step size up or down or volatility increases with the time interval under consideration. 1 Table 1 displays volatility for two dollar-based variables. Such volatility is highly relevant for developing country firms, as much project financing these days is in dollars, Deutsche marks and Japanese yen and most exports from developing countries are denominated in these currencies.
GUY P. PFEFFERMANN DIRECTOR, ECONOMICS DEPARTMENT & ECONOMIC ADVISER OF THE CORPORATION Page vii Abstract This paper considers the use of risk management techniques and instruments by firms in developing countries. Increased financial market volatility in recent years has led to the development of a number of new financial instruments for managing the risks associated with specific transactions. In most developing countries, however, firms face substantial obstacles to using these instruments. Despite that, developing country managers are becoming more and more aware of the need to manage risk.