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If a business does not receive payment for any reason, it risks losing money.

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Understanding risk and how to reduce it can promote successful international business.

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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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Risk vs. Return

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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.

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Managing Money and Risk

Success in international business means carefully managing every aspect of currency exchange.

It also requires managers to assess risks in transactions and to take steps to reduce those risks.