Thuyết trình trade risks in international payment

Product risks:  These risks become even more complicated when it comes to whole projects or larger and more complex contracts  These are often completed over longer periods and invol

TRADE RISKS IN INTERNATIONAL PAYMENTS

TRADE RISKS

TRADE RISKS

A

B

C D

E F

Product, production and transport risks

Product, production and transport risks:

A

1 Product risks & manufacturing risks:

a Product risks:

Product risk are risks that the seller automatically has to acccept as an

integral part of their commitment.

- Matter of the product itself

- Matters of this nature may well => + disputes between the parties after the

contract has been signed

+ increased cost for the delivery

1 Product risks & manufacturing risks:

a Product risks:

 These risks become even more complicated when it comes to whole

projects or larger and more complex contracts

 These are often completed over longer periods and involve many more possible combinations of interrelated commitments between the

commercial parties

Product, production and transport risks:

A A

1 Product risks & manufacturing risks:

b Manufacturing risks:

- The concept of product risk could also include some

elements of the manufacturing process itself, even if in priciple that subject falls beyond the scope of this handbook

Product, production and transport risks:

A

1 Product risks & manufacturing risks:

b Manufacturing risks:

- Risks of this nature occur as the product planning phase but many often be difficult to cover from that time owing to the special nature of these products

2 Transport risks and cargo insurance

2 Transport risks and cargo insurance

 The owner of cargo usually think that if cargo is broken or loss, it’s responsibility of trasporters So sometimes they send cargo without buying insurance for their cargos

Clauses in sale contract will indicate that who bears the responsible for broken cargos

Product, production and transport risks:A

2 Transport risks and cargo insurance

 The cover under a cargo or marine cargo policy is almost defined by standard policy wordings issued by the Institute of

London Underwriters These are called Institute Cargo

Clauses (ICC)

Product, production and transport risks:

A

2 Transport risks and cargo insurance

 Institute Cargo Clauses (ICC)

Clause types A, B and C

- The widest cover is provided under ICC A (Institute cargo clause [Air] for transport by air)

- ICC B are more restrictive.

- The most narrow cover under ICC C.

Product, production and transport risks:

A

2

Transport risks and cargo

insuranceA

2 Transport risks and cargo insurance

 Cargo insurance according to Incoterms CIP and CIF.

Like Incoterms 2000, in Incoterm 2010, only 2 terms cover insurance : CIF and CIP.

 The seller bears cost of buying insurance, at least equal to ICC C.

 The insurance contract hasto insure at least 110% value of contract.

Product, production and transport risks:

A

2 Transport risks and cargo insurance

 3 different ways to insure the cargo:

- Open insurance policy : covers most or all shipments within the seller’s basic trade as agreed in advance with the insurer

- Specific insurance policy: cover specific shipments on an basis which is outside the set criteria of the open policy.

- Seller’s interest contingency insurance: normally only offered as a complement to the open policy or as integral part of a specific policy

A

B COMMERCIAL RISKS

-Definition: Commercial risk, also called purchaser

risk, is often defined as the risk of the buyer going into bankruptcy or being in any other way incapable

of fulfilling the contractual obligation.

B COMMERCIAL RISKS

 In Organization for Economic Co-operation and

Development (OECD) areas, it is easy to obtain a fair picture of potential buyers.

 With buyer from non-OECD countries the matter

becomes even more complicated The information, if available, will be much more difficult to evaluate and

it will be harder to assess how it has been produced and how it should be analysed.

B COMMERCIAL RISKS

-The importance of credit information :

+ In the commercial environment, the global suppliers of credit information have become a vital source of knowledge and expertise, based on the great wealth of information that they maintain about consumers and how they behave, about

businesses and how they perform, and about different markets and how they are changing.

+ The more the seller understands their customers, the more they are able to

respond to their individual needs and circumstances Credit information

suppliers help the seller use information to reach new customers and to build,

nurture and maximize lasting customer relationships Therefore, credit

information forms a vital part of establishing the structure of a potential export transaction and, in particular, the terms of payment to be used

B COMMERCIAL RISKS

- Solution to reduce commercial risk for the seller:

 Engaging a trustworthy credit agency or credit insurer to

reduce buyer’s indebtedness or credit risk;

 Engaging on additional secured techniques of payment such

as documentary credit or advance payment;

 Guarantee that the sales contract or documentary credit does

not contain unclear or inaccurate expressions and circumstances that are subject to future disagreements;

 Obtaining adequate information in document preparation to

mitigate against documentation risk

C Political Risks

1 Definition

Political risks is the risk of a separate commercial transaction not being realized in a contractual way due to measures emanating from government or authority of the buyer’s own or any other foreign

country

2 Causes

The political risk could be divided into different underlying

causes, such as Political stability; Social stability; Economic

stability

C 1 Political stability;

Political instability can lead to changes in trade policy, restrictions on foreign transfers, restrictions on the importation or exportation of certain goods, changes in monetary policy leading to devaluation of the local currency, and

riots or civil unrest causing loss or damage to merchandise potentially not

covered by insurance, among other problems

Although political risks are generally outside the direct control of either

trader, they can sometimes be predicted in the short term and managed to a

degree

- Legal Risk

Legal risks can also affect an international transaction and can only

be managed through extreme diligence Lack of comprehensive

knowledge of legal issues can precipitate problems unimaginable in the local marketplace These include unknown procedural restrictions, import regulations, and more

o BUYER/IMPORTER: Considers political risk to be minimal in

part because he lives with it every day and understands it

o SELLER/EXPORTER: May consider political and legal risks to

be significant, especially if the country appears to be unstable

by his own standards

C Political Risks

2 Social stability;

Different countries have their unique language and culture The inability to appreciate/accept cultural differences and/or language barrier may result in conflicts and non-completion of the sales contract.

C Political Risks

3 Economic stability.

Economic risk refers to unfavorable economic conditions in buyer or seller's country which may affect both parties in fulfilling their obligations

• On the buyer side, economic risk may result in buyer’s insolvency or

inability to accept the goods or services

• On the seller side, they may experience difficulty in producing or

shipping the goods

ADVERSE BUSINESS RISKS

D

Definition: Adverse business risks include all business

practices of a negative nature, which are not many

common also andemic in some part of the world.

This could have serious consequences for the

individual transaction, but also for the general business and financial standing of the seller ,as well as their moral reputation

ADVERSE BUSINESS RISKS

systems,and both banks and traders can innocently fall victim of such

activitiy if not exercising due diligence

ADVERSE BUSINESS RISKS

D

Influences: Bribery ,money laundering and any other form

of corrupt behavior is bad for business

+ It is also extremely harmful for the countries themselves ,owing

to the damage it causes to the often fragile social fabric

+ It destroy yhe economy and is strongly counterproductive for

trade and all forms of foreign investments into the coutry

+ In the long run, such practices also prevent social and economic stability and developments, and it has an especially impact on the most disadvantaged parts of the population

ADVERSE BUSINESS RISKS

D

Solution is the need for a strong policy

+ The world bank and the OECD have put a great deal of

resources into cobating corruption worldwide, and in most

coutries corruption is now illegal even when committed overseas

+ Every company involved in overseas trade or investment

should have a clear anti- corruption policy that is implemented

and clearly understood by all its employees

For example :

Suppose that a U.S.-based investor purchases a German stock for 100 euros While holding this bond, the euro exchange rate falls from 1.5 to 1.3 euros per U.S dollar If the investor sells the bonds for 100 euros, he or she will

realize a 13% loss upon conversion of the profits from euros to U.S dollars

However, if that investor hedged his or her position by simultaneously selling the euro, then the profit from the euro's decline would offset the 13%

short-loss upon conversion

2 How to manage Currency Risk :

One simple, flexible, and liquid alternative to hedge against currency risk are currency-focused exchange-traded funds (ETFs).

The two most popular providers are CurrencyShares

ETFs covering a number of different currencies

2.1 Determining if a Hedge is Necessary:

A few common questions to ask before hedging:

 Does the cost of the hedge represent a disproportionate amount of

the total investment? In other words, does the cost outweigh the currency's downside risk?

 How long are you holding the foreign security?

Over the short-term, currencies tend to fluctuate relatively little, which means the cost of the hedge may not be worth the marginal benefit.

 Do you think there's a significant risk of the currency declining?

During stable economic times, currencies tend to trade with relatively low volatility, making hedges somewhat unnecessary.

2.2 Creating a Hedge against Currency Risk:

If a hedge seems reasonable, the next step is finding the appropriate ETF to use

Here are some common currency ETFs:

 CurrencyShares Canadian Dollar Trust (NYSE: FXC)

 CurrencyShares Australian Dollar Trust (NYSE: FXA)

 WisdomTree Dreyfus Chinese Yuan Fund (NYSE: CYB)

 WisdomTree Dreyfus Brazilian Real Fund (NYSE: BZF)

Here are the steps to hedge against currency risk with an ETF:

 Identify the ETF

 Determine the Direction

 Calculate the Amount

 Manage the Trade

• overview: all activities such as purchase,

production, shipment place a financial burden on transaction

 Risk assessement:

F

• Problem:

the cost will be more expensive and the buyer’s own bank will

be reduce their available credit limits

• Seller try to cover the remaining risks in some other way or

find a compromise by offering compensation to buyer

F

Thanks for watching