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RISK MANAGEMENT IN INTERNATIONAL

TRADEby : ARITRA PALLAB

SIL AUD 0384

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WHAT IS INTERNATIONAL TRADE?

O International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events.

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IMPORTANCE OF INTERNATIONAL TRADE

O Provides goods and services.O Provides employment.O Controls the cost of goods and

services.O Makes an organization global.

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WHAT IS RISK?

O Risk is defined as the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment.

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TYPES OF RISKS

O Buyer’s Insolvency/Credit Risk

O Buyer’s Acceptance Risk

O Knowledge Inadequacy O Seller’s Performance

Risk O Documentation Risk O Economic Risk

O Cultural Risk O Legal Risk O Foreign

Exchange Risk O Interest Rate

Risk O Political/

Sovereign Risk O Transit Risk

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FOREIGN EXCHANGE RISK MANAGEMENT

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FOREIGN EXCHANGE RISK

O It can be defined as the variability of a firm’s value due to uncertain changes in the rate of exchange.

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THREE ASPECTS OF FOREIGN EXCHANGE RISK

Transaction Risk Translation Risk

O The risk of changes in the expected value of a contract between its signing and its execution as a result of unexpected changes in foreign exchange rates.

O Gains or losses from exchange rate changes that occur as a result of converting financial statements from one currency to another in order to consolidate them.

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THREE ASPECTS OF FOREIGN EXCHANGE RISK

Economic Risk

O Changes in competitive position as a result of permanent changes in exchange rates.

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PAYMENT RELATED RISK MANAGEMENT

It is impossible to be in international trade without involving your bank for all the services they provide such as advice on financial issues and the potential risks involved.

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PAYMENT METHODCash in Advance

Documentary

Collections

Open Account

Letters of Credit

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PAYMENT METHODO Cash in advance: With cash-in-advance

payment terms, the exporter can avoid credit risk because payment is received before the ownership of the goods is transferred.

O Documentary Collections: A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporter’s bank), which sends documents to a collecting bank (importer’s bank), along with instructions for payment.

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PAYMENT METHODO Open account: An open account transaction is a

sale where the goods are shipped and delivered before payment is due.

O Letters of Credit: Letters of credit (LCs) are one of the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents.

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CONCLUSIONO With the advantages of liquid and profitable, trade

finance is a business that is actively promoted by commercial banks. Bankers wish to enlarge the business scope and increase market share through trade financing innovation.

O Risk identification framework along with the establishment of risk evaluation indicator system will enable bankers to have an apprehensive understanding of the risks involved in trade financing innovation, and provide the bankers with early risk alert and guidance in the innovation.

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CONCLUSION

O Effective mitigation process can bring much better lending process by which the international trade can be financed in a risk free manner.

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