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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.
Time Risk
Economic Risk
risk
the possibility of loss
when there is
uncertainty associated
with the outcome of an
event
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.
Time Risk
commercial risk
a risk present in
day-to-day buying and
selling processes
between companies
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
Cash in
Advance
(CIA)
This is a simple and safe way to complete a sale when the
buyer has political or economic instability.
Letter of
Credit (LC)
This is a legal document that a bank sends to the seller
guaranteeing the seller will receive payment.
Bill of
Exchange
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.
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Reducing Transaction Risk
Methods of Reducing Transaction Risk
Sale on
Account
This is a form of short-term credit the buyer has with the seller.
This is riskier than other forms of reducing transaction risk.
Promissory
Note
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.
Electronic
Funds
Transfer
(EFT)
EFT is simple, secure, and quick, moving funds within hours.
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Commercial Invoice
Information on a commercial invoice includes:
What was sold
The terms of the sale
Dates for sale and
shipment
The price
Terms of payment,
including discounts or
interest charged
Shipping information
Early payment discount
Quantity of goods
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Insurable Risk
Fire is an example of an
insurable risk.
Insurable business risks
hinge on one question:
Who owned the property
when the loss occurred?
insurable risk
a risk that insurance
companies will cover,
including an “act of
God” and other lessrandom events
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Insurable Risk
Random Events
Preventable Events
Fire
Negligence
Weather or Storms
Theft
Earthquakes
Terrorism
Natural Catastrophes
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Preventing Insurable Risk
There are two major forms of risk that are
insured in international trade.
Loss
Loss occurs when merchandise
is stolen, lost, or damaged.
An insurance certificate states
the amount of coverage.
Liability
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.
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