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

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

4 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

5 Risk vs. Return

6 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

7 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

8 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.

9 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

10 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

11 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)

12 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

13 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?

14 Insurable Risk Fire Weather or Storms Earthquakes Natural Catastrophes Random Events Negligence Theft Terrorism Preventable Events

15 Preventing Insurable Risk There are two major forms of risk that are insured in international trade. LossLiability 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.

16 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.