Chapter 5 - International Trade risks (3/3) Flashcards
What are the different types of risk with international trading?
1) Credit Risk
2) FX RIsk
–Transaction Risk
–Translation Risk
–Economic Risk
What is credit risk?
An overseas debtor does not pay on time or at all
What is transaction risk?
When a business enters a short term transaction, involving credit in a foreign currency
FX may move, hence the value of the transaction may change
aka business dont know what XR will be when customer actually pays
What is Economic Risk?
When a business is trading in a particular country, performance will be affected by the performance of the economy of the country
if fx results in the decrease in demand from UK suppliers, decreasese cash flow
What is translation risk?
When a business holds assets and/or liabilities in a non-native currency.
Funds have to be translated into native currency to be included in year end accounts
What is hedging?
The process of risk management
What are the different types of transaction risk hedging techniques?
Internal
-Invoicing customers in home currency
-Leading and Lagging
-Matching payments and receipts
External
-Fixed contracts
-Flexible contracts
Impact of invoicing customers in home currency?
All exchange risk on customer
Can use stable 3rd currency - to spread risk across payments
Impact of leading and lagging
getting customres to pay early or delay paying suppliers
-so business can take advantage of favourable XR
Potential interest costs to consider
Impact of matching payments and receipts
If recipts in $, find suppliers in $, may need $ bank though
reduce currency conversion need
What are fixed contracts
1) Forward contract
2) Futures contract
3) money market hedging
What is a flexbile contract eg.
options
What is the option flexible contract?
Essentially FX insurance
-Pay upfront premium, set a lowest limit of FX rate
above dont excersize and below can excersise
What is a forward contract?
Fixes future XR of a transaction today, for a fee
What is a future contract
Standardised contracts to convert a fixed amount of one currency to another at a fixed future date
Tradable
