Financial Risk in Export Markets
Business Management and Enterprise (Year 12) - Management (U3)
Non-payment of monies is when an individual/business does not pay you. This could be due to 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:
A prepayment 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 is when the importer’s bank transfers funds that are then stored in an escrow until 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.
The importer's bank sends a letter of credit guaranteeing the exporter payment on receipt of trade documents and goods. It is commonly used by importers, 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 New Zealand and Iran, who traded oil for lamb.
Currency fluctuations refers to the variances in the exchange rate. Ways of countering this include:
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.