Learning unit: Finance of international trade. Country risk. Syllabus:
Objectives of the learning unit - Finance of international trade:
Sample of the learning unit- Finance of international trade:
Learning unit summary (International Finance):
There are two basic forms of finance of International trade transactions: import finance and export finance. Both can be performed in the currency of the exporter (for example, Euros) or in any other fully convertible currency agreed by both parties. In the second case the company assumes certain risks as to the difference in exchange rates, however, it can also profit from trading in another currency if there is a rise in the value of the foreign currency.
Financial transactions in foreign trade can be performed in the currency of the exporter, in the currency of the importer or in a third currency.
In many cases export companies must facilitate finance for their clients mainly due to the requirements of the market. In a foreign exchange market dealers Trade in currencies. Exports of products and services, Foreign direct investment, foreign loans, etc. Form currency supply whereas currency demand is formed by imports, Foreign direct investment abroad and other factors.
These operations stimulate the buying and selling of currencies in a market governed by supply and demand. If payment for a service provided or products delivered to a foreign client is in a currency other than in which the exporter usually operates, the exporter is exposed to the risk of exchange rate fluctuation.
In any exporting or importing transaction there is a range of risks to be
The underlying commercial contract should clearly state the description of the products, delivery terms, when and by what means payment is to be made, the documents required which will allow the importer to obtain delivery of the products and to arrange clearance through customs, the currency in which settlement is to be effected and any specific requirements attaching to the shipment.
Country risk is caused by political (unwillingness to repay) or economic (inability to repay) events in a particular country. Normally, country risk is measured as transfer risk or cross border risk, which are other terminology used to describe country risk. The central element of transfer risk is the possibility that the borrower may not be able to secure foreign exchange to service its external debt due to economic or political risks of a country, despite accessibility of local currency.
Sovereign risk is the risk of the government or government related entity making payment. Country risk embodies both govern and commercial risk.
The Corruption perceptions index measures the perceived level of public-sector corruption in 180 countries economies.