1a. International trade exposes both exporters and importers to risks that are generally more complex than those found in the domestic market. Discuss the three principal risks that the commercial parties in an international trade transaction face. Provide details and examples of each area of risk, for both of the commercial parties, in your answer. Identify one source of risk information which can be used to assess any of the three risks discussed above.
Answer: The international trade risks are:
• Commercial risk
This could be as one of the parties not to be paid, not delivered
• Foreign exchange risks
Volatile foreign currency
• Country risks
Stable political climate, positive economic environment
1b. State what method(s) you would use to effectively manage each of the risks mentioned in 1a.
2. Identify one Incoterm 2012 from each of the four broad categories of Incoterms, and discuss the conditions in which you might use that particular Incoterm. Explain the financial and risk implications for each commercial party in an international trade transaction when using that Incoterm.
3a. Foreign Exchange risk is something that everyone must be aware of in global trade. Describe this risk and how it can negatively and positively affect an exporter’s transaction.
3b. When managing Foreign Exchange Risk, a forward contract or a future contract can be used. Describe how each of them works.
4. Bonds or standby letters of credit are an important feature of international business. Identify and explain each type of bond and describe the advantages and disadvantages of each for both parties in an international trade transaction. Identify one major risk for an exporter who might issue a bond. Is there a way to mitigate against this?
5. Define the characteristics of a Documentary Collections compared to a Letter of Credit. Explain the risk implications for a Documentary Collections compared to a Letter of Credit for each commercial party in an international trade transaction.