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Various Types of Risks Encountered by Corporate Units in Cross Border As part of the Liberalisation and globalisation of national economies, Governments in the process of trying to boost the export of goods and services, will try to encourage Corporate units to get involved in cross-border trade and cross border technology tie-ups. However the process of increasing cross border trade, cross border financing and cross border technology tie-ups will also imply that the cross border risks is an important element in any Corporate plan to go in for cross border markets.
Managing of Cross Border Risks Many of the perils, which are potential in export/import trade, can be avoided if prudently handled. Except the risk of exchange and currency fluctuations most of the other risks are classified as Commercial or Political risk. Exporters can cover these risks by opting for Insurance from Export Credit Guarantee Organizations, which protect both the exporters and the financing banks. The risks for an importer of these categories are comparatively less and the importer have avail maximum benefit from establishing Documentary Credits with suitable terms and conditions intended to ward off all conceivable risks. Opting for forward cover can cover currency and exchange risk. Trade and commerce are better established through person to person contacts. Regular Exporters and Importers will do well to visit at least once in a year their counterparts in their countries, which substantially builds mutual confidence. The exporters/importers may also avail the facility of collecting credit reports on their overseas counterparts through their Bankers. A closed analysis of the list of threats faced will indicate that credit risk and delivery risk is common to internal transactions as well. However currency and interest rate risks are peculiar to cross-border business. Delivery Risks Buyers from sellers face the risk. Buyers can ensure that no advance payments is sent to the sellers blindly and purchases are normally covered under Letters of Credit established through first class Banks. Domestic exporters should counteract against their peril, by streamlining inventory management and proper planning material movement schedules proving a small margin ahead of the contracted schedule. Credit risks A safety net for this is the Mode of transactions through Letters of credit, which protect both the seller and buyer. Interest Rate Risk Where there is scope for this threat, it is advisable to go in for shorter-delivery schedules and consignments for ad-hoc sale and purchase instead of over-stretched despatch schedules extended over a long period. The assumption is that this threat does not unfold itself in the short-term, even if it occurs, its impact is within tolerance level. Currency Risk Management Risk management is met through both internal, and external hedging as under Internal Methods
External Methods
Country Risk Monitoring Cross border trading and cross border financing exposes the trader to several risks not normally faced in the domestic trade. These risks can be categorized according their nature and catalogued. In addition to normal commercial risk inherent in all business transaction, overseas trade exposes the trader to risks of political, currency and exchange rate fluctuations, not normally faced in domestic trade. Country risk is one such category. Countries of the Globe operate under varying political and legal system, economic development and financial strength. Most of the currencies of the third world countries are not stable and subject to wide fluctuations in the international market. These countries always suffer an adverse balance of trade and balance of payments. They need huge imports of essential goods and capital equipment, while they are unable to boost their export trade on account of limitations posed by the under developed status of the economy. It is possible that the importer of goods in this country is a sound party and he makes payment to the Bank for the export bill in his native currency. But due to adverse balance of payments position continuously suffered by the country, it does not possess the foreign exchange and hence unable to remit the amount to the exporter. This in particular is an example of the country risk that may be faced by an exporter. A country risk monitoring implies an assessment and rating of the various risks like political, economic or commercial threats inherent in dealing with overseas counterparts in a particular country. The risks emanate from the Country, due to political or economic conditions, or due to the Policy of its government or its Central Bank This assessment takes into consideration the recent past record of that country (say for the last 5 years) and then makes an intelligent projection of future anticipated trends. Such a study at the outset involves the selection of relevant parameters or criteria for identification of the risk perception. It is of particular relevance that the parameters selected should be prioritised and given weightage in terms of their relative importance, A relatively insignificant risk will naturally carry a low priority and an equally low weightage. Categorizing and sub-categorizing Country risks. Broadly the risks inherent in respect individual countries may be studied under categories.
Whether the country is having a sound economy And economic solvency to perform its financial obligations? Is there political turmoil in the country and in case there is a dispute with the importer of the country, whether the country’s legal system provides safeguards for quick remedies? These are the two factors that come in the way of deciding the country’s record. Economic factors reflect the country’s inherent strength or weakness. There are countries with stable economies, as also country suffering from acute balance of payment problems. The political system prevailing in a country shapes its external policy. There are dictatorships, theocratic states, monarchies and democracies, each based on different legal systems and political culture and ethics. Parameters for assessment of Economic Risks:
Parameters for Assessment of Political risks
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