next >>. 2 if a business does not receive payment for any reason, it risks losing money
TRANSCRIPT
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Risk vs. Return
International business includes five basic forms of risk.
risk
the possibility of loss when there is uncertainty associated with the outcome of an event
Time Risk
Economic Risk
Product Risk
Country/Political Risk
Dependency
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Commercial Risk
There are three types of commercial risk.
commercial risk
a risk present in day-to-day buying and selling processes between companies
Time Risk
Economic Risk
Product Risk
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Exchange Rate Risk
Exchange rate risk can be made greater by political turbulence, economic events, and the passage of time.
exchange rate risk
a risk that occurs when the currency exchange rate fluctuates as a transaction takes place
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Reducing Exchange Rate Risk
A “spot rate” is the rate between two currencies for an immediate trade.
A “forward rate” is the rate that is agreed upon in advance for a future transaction.
To manage a forward rate, a manager can use a currency future.
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Transaction Risk
When you sell to a company that has a poor history of repayment, you are increasing the transaction risk.
transaction risk
a risk associated with a buyer making installment payments on a purchase
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Reducing Transaction Risk
Methods of Reducing Transaction Risk
This is a simple and safe way to complete a sale when the buyer has political or economic instability.
Cash in Advance (CIA)
This is a legal document that a bank sends to the seller guaranteeing the seller will receive payment.
Letter of Credit (LC)
This is a bill that states when and where the buyer should make the payment. The buyer deposits the money into the seller’s account at the bank or financial insitution.
Bill of Exchange
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Reducing Transaction Risk
Methods of Reducing Transaction Risk
This is a form of short-term credit the buyer has with the seller. This is riskier than other forms of reducing transaction risk.
Sale on Account
This is a type of contract used to finance a large sale. A promissory note is prepared by the seller indicating when the buyer is going to make payments.
Promissory Note
EFT is simple, secure, and quick, moving funds within hours.
Electronic Funds Transfer (EFT)
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Commercial Invoice
Information on a commercial invoice includes:
What was sold
The terms of the sale
Quantity of goods
The price
Shipping information
Dates for sale and shipment
Terms of payment, including discounts or interest charged
Early payment discount
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Insurable Risk
Fire is an example of an insurable risk.
insurable risk
a risk that insurance companies will cover, including an “act of God” and other less-random events
Insurable business risks hinge on one question: Who owned the property when the loss occurred?
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Insurable Risk
Fire
Weather or Storms
Earthquakes
Natural Catastrophes
Random Events
Negligence
Theft
Terrorism
Preventable Events
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Preventing Insurable Risk
There are two major forms of risk that are insured in international trade.
Loss Liability
Loss occurs when merchandise is stolen, lost, or damaged.
An insurance certificate states the amount of coverage.
Liability is present when a good or service injures someone or another company.