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Management (U3)

Business Management and Enterprise (Year 12)

Financial Risk in Export Markets

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Kanwal Singh

Non-payment of monies is when an individual/business does not pay you. This could be because of the following reasons:

  • The business could be in debt.

  • They could run away, with the money.

  • It could be hard to transfer money.

Ways of countering this include the following:

  • Prepayments is an electronic payment made into the business’ account. There is a high risk for the importer but, it is safe for the exporter.

  • An open account is when a payment is made, once the goods arrive. There is a high risk for the exporter but, it helps cash flow shortages for the importers.

  • A sight bill of exchange involves the importer’s bank transfers funds, that is stored in an escrow, upon sighting trade documentations. These documents prove that the goods have been sent. Documents include bill of exchanges, invoices and packing lists.

  • A time bill of exchange is a bill of exchange, with up to 180 days of maturity. It allows the exporter to have control over the goods, until the payment has been received.

  • A letter of credit is when the importer’s bank sends a letter, guaranteeing the exporter payment, on receipt of trade documents and goods. It is commonly used, by the importer, as all the risk is taken by the bank. However, the bank charges a high fee to the importer.

  • Countertrade is payment by goods. It is used when currency shortages or exchange institution problems are present. It is also used if the importer can’t get trade credit. It is also known as barter. An example could be NZ and Iran, when they traded oil for lamb.

Currency fluctuations refers to variances, in the exchange rate. Ways of countering this are the following:

  • The business can buy a forward exchange contract. This gives the business the ability to sell a quantity, of some good, at a set exchange rate, at a future date. This is used as a way, to prevent the business to be heavily impacted, by currency fluctuations.

  • An option gives the buyer the right, but not the obligation, to buy or sell a currency, at a certain date.

  • Currency swaps are an agreement, between two global economies, to exchange currencies, at some date, and exchange them, back at a future date.


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