R Isks Associated With International Trade Essay

935 words - 4 pages

RISKS ASSICATED WITH INTERNATIONAL TRADE The principal of effective trade is certainty. The seller needs to be assured that they will receive payment and the buyer in turn needs to know that he or she will indeed receive delivery. When trade is executed beyond national frontiers, it invariably is subject to uncertainty, (risk). To successfully participate in off shore transactions, a strategic methodology must be adopted to combat exposure. It is important to be aware that buying or selling overseas requires a different financial strategy compared with buying and selling in the domestic market. The task of exporting or importing is a complex operation, which requires professionalism and a high level of awareness of common international exposures. International trade has three broad categories of risk. Credit risk, transfer risk and foreign exchange risk, these three elements of international trade need to be addressed prior to any international transaction.The sheer scale of selling or buying goods from another country is the primary factor in regards to credit risk. Delivery takes longer, contracts are more complex and subsequently credit arrangements are more convoluted. Globalisation is inevitably making international trade markets more competitive, as a consequence throughout the late 20th and early 21st centuries there has been a general increase in demand for longer trade periods and discounts. Longer trade periods exacerbate credit risk exposure.With floating currency values at present, importers and exporters become vulnerable to any changes in currency values that may occur between conclusion of a contract and the date at which payment is due. This is commonly referred to as foreign exchange risk. There are three categories of FX risk. They include: transaction exposure, translation exposure and economic exposure. Transaction exposure is where changes in the exchange rate value affect future cash transactions. Translation exposure is where fluctuating exchange rates affect the value of overseas investments, (assets and liabilities). Finally economic exposure is a situation whereby the value of overseas profits is subject to exposure by fluctuating exchange rate values.Different legal systems provide varying frameworks within which the exporter and importer must consider to properly safeguard their interests. Most exporters and importers find themselves dealing with a number of different countries, subsequently this increases risk of sales contracts being upset by political disturbances or sudden unexpected foreign legislation. Without proper precautions such as cargo insurance, a seemingly simple off shore transaction can turn disastrous. Arguably, no part of export is more important than transfer risk.METHODS OF PAYMENT AND INSTRUMENTS OF TRADE FINANCE Finance institutions and banks internationally have recognised common trade problems and have devised financial instruments and various different methods of payment to directly address...

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