Financial Risk: Currency Fluctuations

Question 1

Two sources of financial risk in export market are?

Answer 1

1.Currency fluctuations

2.Non-payment of monies

Question 2

currency fluctuations

Answer 2

change in the **exchange rate ** of a counrty’s currency relative to another counrty’s currency(constant)

Question 3

summary of currrency fluctuations

Answer 3

these fluctuations occur due to factors, including changes in** supply and demand** dynamics, economic indicators, geopolitical events, and consumer confidence

Question 4

appreciate in business

Answer 4

currency goes down in value

Question 5

why is Apreciation in currency a risk for expoerters

Answer 5

Depreciation will ** mean that the foreign currency buys fewer Australian dollars than it did before**, or in another way, $1AUD can be exchanged for less foreign currency than it did previously.

Risk in Export Markets=less revenue & loss of profit

Question 6

Non payment of monies

Answer 6

the failure or refusal to fulfill financial obligations, including debts, invoices, or contractual payments, resulting in the absence of the expected transfer of funds.

Question 7

challenges of international transactions and being an exporter

Answer 7

1.delays /non payment
2.loss or damage during transit
3.fluctuations in exchange rates
4.increased transport costs

Question 8

How to mitigate risks when exporting goods

Answer 8

exporters can opt for
1.prepayment arrangements
2.international money transfer services **
3.getiting foreign currency accounts**

Question 9

link this stuff to currency fluctuations when doing a question on this

Answer 9

currency values can vary over time ,
they impact international trade ,investement returns and business engaged in cross-border transactions

Question 10

how does depreciation of a currency affect exporters

Answer 10

For an exporter that relies on income from international buyers, this means that they will receive less income in exchange for the same products/services.

Question 11

Financial risk of currency fluctuations

Answer 11

exporters may experience an decrease in revenue when the Australian dollar APPRECIATES aginst the foreign currency which is being traded

Question 12

why are non-payment monies a risks to exporters?

Answer 12

1.They can result in Financial loses
2.disrupt cash flow
3.strain business relationships

Question 13

Strategies for minimising financial risk in export marketing, include….

Answer 13

1.Documentation

2.Insurance

3.Hedging

Question 14

define Documentation

Answer 14

The Policies and procedutes relating to payment methods for international transactions

use this for non-payment of monies -minimise the risk of delays in payment from importers

Question 15

examples of Documentation you need to know.

Answer 15

1.Prepayment options
2.Letter Of Credit
3.Document against Payment

Question 16

Prepaymnet Options

Answer 16

The exporter requires buyers to make an electronic payment before the goods are sent. 

This eliminates the risk of non-payment of monies.

It also removes the time lag between transaction and payment, and so avoids currency fluctuation risk!  

However, this is a high risk for an importer as the exporter may fail to deliver goods

Question 17

Letter of Credit

Answer 17

A **Letter Of Credit is an official letter from the importer’s bank that confirms the money will be paid to the exporter
**

A letter of credit insures that the exporter will be paid by the importer’s bank. The bank will then follow up with the customer to recoup the funds ( all risk is with the importer’s bank).

The letter of credit must outline the payment terms and conditions, including the number of days. The bank has to pay the money, the condition in which the goods must arrive etc (this protects the importer as well as the exporter).

Importers may also feel more comfortable dealing with their own bank, rather than sending the money directly to an unknown exporter.

Question 18

Documents Against Payment

Answer 18

An exporter send the goods to an importer’s country, and they are held in customs (like being held at the border).

The exporter signs documents to the importers bank. These documents can later be exchanged for the goods.

In order to obtain the goods, the importer must pay the bank the money to get hold of the documents. The payment is then sent to the exporter. The importer can then take the documents to customs to prove that they are the new legal owners of the goods, and they will be able to pick them up.

Question 19

insurance

Answer 19

a contractual agreement where a business **pays a premium ** to an insurer in exchange for Financial protection against specified risks/losses

Question 20

what is Credit?

Answer 20

Credit is incurred when one business provides a product or a service to an entity prior to that entity making payment for the product/service.

Question 21

Hedging

Answer 21

hedging strategies, such as forward contracts or currency options, allows exporters to mitigate the risk of currency fluctuations (stable pricing and protecting profit margins)

Question 22

why would business use documentation

Answer 22

1. to minimise the risk of delays in payment from importers **
2. And to **minismize the failure of exporters to deliver

use documentation for non-payment of monies

Question 23

By meticulously handling documentation, exporters can ……?

Answer 23

reduce the risk of financial loss, disputes, and delays in international trade, thereby safeguarding their business interests and reputation.

Question 24

3 types of insurance

Answer 24

1.Export Credit Insurance (to reduce the risk of non-payment of monies)
2.Political Risk Insurance (to reduce the risk of non-payment of monies or damage to goods)
3.Transit or Shipping Insurance

Question 25

key benefits of insurance

Answer 25

Mitigating Non-Payment Risk

Enhancing Financial Stability (e.g. protecting cash flow)
Facilitating Business Growth (greater confidence to explore new markets)

Question 26

hedging

Answer 26

a financial strategy used to minimise or offset the risk of currency fluctuations by taking offsetting positions such as** forwards or options.**

Question 27

what does Hedging look like?

Answer 27

Hedging in export markets involves using** financial instruments** such as forward contracts or currency options to mitigate the risk of currency fluctuations, ensuring stable pricing and protecting profit margins in foreign exchange transactions.

Question 28

examples of financial intsruemnets

Answer 28

forwards or options.

Question 29

what do forwards and options seek to do?

Answer 29

set an agreed rate of exchange that is fixed and not subject to normal currency fluctuations that occur between the time of the agreement and the time of payment.

Question 30

what are forwards

Answer 30

fixed rate of change for the transaction between the exporter and customer.when payment is made that agreed exchange rate will appply.

Question 31

options

Answer 31

the exchange rate is set but if better then use better @ that time of transaction for the exporter instead of the agreed rate.

Question 32

benefits /rationale for hedging

Answer 32

Stability in Pricing(e.g. lock in exchange rates, ensuring stability in revenue and cash flow)

** Minimising Volatilit**y(e.g. **reduce the impact of market volatility) **

Enhancing Competitiveness (e.g. offering competitive pricing to international buyers, confidently being able to quote prices)

Question 33

what happens to exporters that rely on income from international buyers when their currency appreciates?

Answer 33

they will receive less income in exchange for the same products/services.

Question 34

By hedging exporters can ….?

Answer 34

**reduce the risk of financial losses **that occur due currency fluctuations, a normal risk to international trade.

Question 35

volatile

Answer 35

changeable and unpredictable