Chapter 8: Strategic Alliances Part 2 Flashcards
1
Q
Sources of Financial Risk:
Currency Fluctuations
A
- A natural outcome of the floating exchange rate system where it is influenced by numerous fundamental and technical factors
- Often spot rate may differ from rate when the contract was made
2
Q
Sources of Financial Risk:
Non- Payment Monies
A
- Not receiving payment after incurring cost and possibly providing g/s
- Unlike domestic transactions, it is hard to track down customers that has not paid in another country, and find legal recourse to recover the debt
- The longer the delay between providing g/s and payment, the higher the risk of non payment
3
Q
Sources of Financial Risk:
Damage during Transit
A
- Due to accidents during shipment
- Cost would be incurred if shipment is damaged or lost
4
Q
Ways to Minimise Financial Risk:
Prepayment
A
- When customers agree to pay in advance of receiving goods and services
- Assures payment from customers but customers face the risk of non-delivery and have an adverse impact on cash flow
- Transfer through bank and credit card payment
5
Q
Ways to Minimise Financial Risk:
Documentary Letter of Credit
A
- Form of guarantee from a third party, that is the customer’s bank, that payment will be made
- Detailing all the terms to be met before payment
- Act as an assurance that customer will pay
- Goods will arrive as ordered: not damaged and on time
- If terms are met, transaction will take place
- If terms are not met due to insufficient fund, customer’s bank will pay and then chase after customer for reimbursement
6
Q
Ways to Minimise Financial Risk:
Documentary against Payment
A
- The exporter will send a bill or any documents that will allow the buyer to collect the goods, to the buyer’s bank
- The buyer can only collect the bill once payment is made
7
Q
Ways to Minimise Financial Risk:
Hedging
A
- A forward contract will that fixes the exchange rate so a business can be sure of the amount they will receive
Forward hedging
- The exchange rate is set and payment is made on the agreed rate
Options hedging
- Payment can be made at either the agreed exchange rate or the current rate if it is a better choice
