3.10: Sources of Risk in Export Markets and Minimisation Strategies

Question 1

What are the two sources of Financial Risk in Export Markets?

Answer 1

• currency fluctuations
• non-payment of monies

Question 2

Explain how Currency Fluctuations are a source of Financial Risk in export markets.

Answer 2

Refers to the change that occurs in the dollar value of one country’s currency relative to another country’s currency. The value of these currencies are typically determined by the strengths or weaknesses of the underlying countries’ economies and as such cause changes (fluctuation) in these rates, causing risk. Examples of resulting risks include: consumer demand elasticity, increase in the price of imports, competitiveness of international exports.

Question 3

Explain how the Non-Payment of Monies are a source of Financial Risk in export markets.

Answer 3

A non payment is defined as the failure of a debtor to meet the obligation to pay a sum of money that they owe. This can cause difficulties in recovering the debt in an international market. There are associated costs in recouping monies from offshore markets including legal, time, effort and the knowledge of how to do this. As a result, domestic customers typically pay quicker than foreign customers.

Question 4

What are the three Strategies for Minimising Financial RIsk in export markets?

Answer 4

• documentation
• insurance
• hedging

Question 5

Explain how Documentation is a strategy for minimising financial risk in export markets.

Answer 5

Documentation can include documentary letters of credit and documents against payments, which can be used to protect against payment default by importers/customers. Documentary letters of credit act as a guarantee from a bank that the payment will be paid in full. Documents against payment occur when an exporter uses their bank to send a bill, and any documents that will allow the buyer to collect the goods from the customer’s bank.

Question 6

Explain how Insurance is a strategy for minimising financial risk in export markets.

Answer 6

Insurance provides protection against the risk of exporters selling their products on credit. Insurance can prepare for possible bad debts, insure against non-payments, and loss or damage to goods, or mitigate unexpected losses. Firms often offer generous credit terms to their customers to encourage sales. It is harder to follow up on a customer internationally than domestically in this regard, which is where insurance helps.

Question 7

Explain how Hedging is a strategy for minimising financial risk in export markets.

Answer 7

Hedging is a method used to reduce losses from exchange/interest rate variations. It entails a business to make an investment that will make a return that can be used to offset any losses from another investment.
Two forms of hedging are forwards and options:
Forwards are when the exporter and the customer sign a contract that sets an exchange rate for the transaction. When a payment is made the agreed exchange rate will apply.
Options are when an exchange rate is set which can be used instead of the current exchange rate at the time of payment. If the exchange rate is better for the business, it can be used in the transaction instead of the agreed rate.