5014 - Finance of International Trade - Risks of International Trade p1-37 Flashcards
General risks and problems of International Trade
Limited Market Knowledge
Lack of knowledge regarding the rules of trading
Securing Payment
Transit Risk - Time and Distance
Economic and Political Risk
Exchange Rate Risk
What has to be negotiated in import and export contracts
The Price Per Unit
The currency of payment
Method of Payment
Documents to be dispatched
Transport responsibilities
How money will be remitted
Whether guarantees or bonds are required to secure a contract
What are the methods of payment for international contracts
Open Account
Collections - D/P and D/A
Letters of credit - Sight or Term
Payment in advance
What documents might be involved in international trade?
Bills of landing Invoice Insurance documents Certificate of Origin Third party certificate of inspection
What is an ERM?
Enterprise Risk Strategy - how they deal with risks
Risk Management Process
IDENTIFY the risk
Assess the PROBABILITY of its occurrence
Assess the IMPACT
Determine ACTION to manage the risk
Response to Risk
There are 4 options available known as the 4 T's: Terminate Treat Tolerate Transfer
Risk Termination
Avoidance of the risk by changing the project plan to eliminate the risk to protect the project form its impact
Risk Tranfer
Moving the consequence of a risk to a third party, it doesn’t eliminate the risk but gives the third party responsibility for its management. Can be a contract or a premium, insurance for example
Risk Treat
A strategy used to reduce the risk probability or its impact by taking early action to reduce the occurrence of the risk to an lowered level. Proactive rather than reactive
Risk Tolerance
Accepting that the risk exists and could happen and not changing anything to avoid it, possibly because no strategy to reduce the risk exists or one does and its not cost effective. For example natural disasters are a risk out of anyone’s control
Treat or Tolerate?
Some companies will run the risk as they do not consider the risk to be severe or they may be speculative about the risk
Others will choose to hedge and remove risks to allow them to concentrate on other risks
A customer wants Product A for $150,000 on open account terms for 3 months, what’s the risk?
Risks of an open account:
- Non acceptance of goods
- Non payment
If debt does occur, its costly to recover
Legal system differences
Cashflow problems by not having that money for 3 months
Exchange rate risk
