1a. International trade exposes both exporters and importers to risks that are g

Question

1a. International trade exposes both exporters and importers to risks that are generally more complex than those found in the domestic market. Discuss the three principal risks that the commercial parties in an international trade transaction face. Provide details and examples of each area of risk, for both of the commercial parties, in your answer. Identify one source of risk information which can be used to assess any of the three risks discussed above. Answer: The international trade risks are: •Commercial risk This could be as one of the parties not to be paid, not delivered •Foreign exchange risks Volatile foreign currency •Country risks Stable political climate, positive economic environment   

1b. State what method(s) you would use to effectively manage each of the risks mentioned in 1a. Answer:
2. Identify one Incoterm 2012 from each of the four broad categories of Incoterms, and discuss the conditions in which you might use that particular Incoterm. Explain the financial and risk implications for each commercial party in an international trade transaction when using that Incoterm. Answer:
3a. Foreign Exchange risk is something that everyone must be aware of in global trade. Describe this risk and how it can negatively and positively affect an exporter’s transaction.
Answer:
3b. When managing Foreign Exchange Risk, a forward contract or a future contract can be used. Describe how each of them works. Answer:
4. Bonds or standby letters of credit are an important feature of international business. Identify and explain each type of bond and describe the advantages and disadvantages of each for both parties in an international trade transaction. Identify one major risk for an exporter who might issue a bond. Is there a way to mitigate against this? Answer:
5. Define the characteristics of a Documentary Collections compared to a Letter of Credit. Explain the risk implications for a Documentary Collections compared to a Letter of Credit for each commercial party in an international trade transaction. Answer: 1a. International trade exposes both exporters and importers to risks that are generally more complex than those found in the domestic market. Discuss the three principal risks that the commercial parties in an international trade transaction face. Provide details and examples of each area of risk, for both of the commercial parties, in your answer. Identify one source of risk information which can be used to assess any of the three risks discussed above. Answer: The international trade risks are: •Commercial risk This could be as one of the parties not to be paid, not delivered •Foreign exchange risks Volatile foreign currency •Country risks Stable political climate, positive economic environment   

1b. State what method(s) you would use to effectively manage each of the risks mentioned in 1a. Answer:
2. Identify one Incoterm 2012 from each of the four broad categories of Incoterms, and discuss the conditions in which you might use that particular Incoterm. Explain the financial and risk implications for each commercial party in an international trade transaction when using that Incoterm. Answer:
3a. Foreign Exchange risk is something that everyone must be aware of in global trade. Describe this risk and how it can negatively and positively affect an exporter’s transaction.
Answer:
3b. When managing Foreign Exchange Risk, a forward contract or a future contract can be used. Describe how each of them works. Answer:
4. Bonds or standby letters of credit are an important feature of international business. Identify and explain each type of bond and describe the advantages and disadvantages of each for both parties in an international trade transaction. Identify one major risk for an exporter who might issue a bond. Is there a way to mitigate against this? Answer:
5. Define the characteristics of a Documentary Collections compared to a Letter of Credit. Explain the risk implications for a Documentary Collections compared to a Letter of Credit for each commercial party in an international trade transaction. Answer: 1a. International trade exposes both exporters and importers to risks that are generally more complex than those found in the domestic market. Discuss the three principal risks that the commercial parties in an international trade transaction face. Provide details and examples of each area of risk, for both of the commercial parties, in your answer. Identify one source of risk information which can be used to assess any of the three risks discussed above. Answer: The international trade risks are: •Commercial risk This could be as one of the parties not to be paid, not delivered •Foreign exchange risks Volatile foreign currency •Country risks Stable political climate, positive economic environment   

1b. State what method(s) you would use to effectively manage each of the risks mentioned in 1a. Answer:
2. Identify one Incoterm 2012 from each of the four broad categories of Incoterms, and discuss the conditions in which you might use that particular Incoterm. Explain the financial and risk implications for each commercial party in an international trade transaction when using that Incoterm. Answer:
3a. Foreign Exchange risk is something that everyone must be aware of in global trade. Describe this risk and how it can negatively and positively affect an exporter’s transaction.
Answer:
3b. When managing Foreign Exchange Risk, a forward contract or a future contract can be used. Describe how each of them works. Answer:
4. Bonds or standby letters of credit are an important feature of international business. Identify and explain each type of bond and describe the advantages and disadvantages of each for both parties in an international trade transaction. Identify one major risk for an exporter who might issue a bond. Is there a way to mitigate against this? Answer:
5. Define the characteristics of a Documentary Collections compared to a Letter of Credit. Explain the risk implications for a Documentary Collections compared to a Letter of Credit for each commercial party in an international trade transaction. Answer:

Explanation / Answer

Soln:

1b)

Ans:Commercial risk : It is defined as the potential risk of payment made by the trading partner after receiving the goods/services. This kind of risk can be managed by trade products and Letter of Credit is the best option in this case to get from the buyer.

Foreign Exchange Risk : It involves the depreciation in domestic currency against the country of export, it can be hedged by using the derivative products like future/forward or swaps.

Country Risk : Before trading in any doubtful country analyse the political , geographical and recent events. Exporter can take International insurance to safeguard this or guarantee from another country or any kind of treaty between the two countries can help it.

2a) Four broad incoterm are Ex , F, C, D

(i) Exworks (EXW): It is used when buyer has to collect the product from the sellers premises and it is majorly used when the seller is having a kind of monopoly or big player in the market. All the freight, Custom duty , custome clearence is the duty of buyer.

(II) FOB : Free on board, i.e. when the seller make the goods available to the buyer at port of origin. After that all the responsibility of any risk , cost or insurance is on importer or buyer till its ware house.

(iii) CIF : Cost, Insurance, Freight all responsibility is on exporter, and major risk is covered by the exporter in this case, as insurance is covered till the goods reached to importer. All the cost, freight incurred in between the export of product is on exporter except the duty clearence.

(iv) DDP : Delivered duty place, best for importer and mostly use when buyer is having upper hand, everything is covered by the exporter till it reaches the warehouse, even the duty paid in importer country or any kind of internal transportation taxes.

3a. Foreign exchange risk is defined as the fluctuation in exporter currency negatively against the importer currency.

It will affect the receivable or lower the receivables which is being decided at firt instance. As foreign currency will appreciate overtime and give less amount of exchange to the exporter and vice vers is also true exporter can get better return if foreign currency depreciates against domestic currency.

3b. Forward contract is a non standardized contract between two parties to decide on future price of the underlying and the buyer of forward have an obligation to buy the underlying at that fixed future price.

No insurance or protection.

Future contract is standardized one and routed throug exchange, other things are similar to forward contract. So, protection is provided to the dealers.

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