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Student Name: Otabek Askarov

Student Number: B1804912
Course: BSc (Hons) in Finance, Investment and Risk
Module Code and Title: MASB3210 International Finance
Module Leader: Mr Lim Khai Seng
Module Tutor: Farudin Odilov
Assessment: Main Examination
Due Date: 26 January 2021 Date Submitted: 25 January 2021
Weighting within Module: 70%

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CONFIRMED BY THE EXTERNAL EXAM BOARD

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ALL MARKS ARE PROVISIONAL AND ARE SUBJECT TO CHANGE UNTIL

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Table of Contents

Factors Influencing Exchange Rate 2

International Payment Methods 3
International Trade Risks 5
Foreign Direct Investment 6
Works cited 7
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Factors Influencing Exchange Rate

Changes in the relative inflation, interest rate, income, government control and future
expectations are main factors influencing the exchange rate.

Inflation
Let’s consider the US dollars and British pounds as an example. If there is a sudden increase
in the US inflation, American consumers will want to buy more British products because of
the value decrease of their own home currency. At the same time, American products will be
less attractive for the British because when the inflation rises in the US it makes American
businesses increase the price of their products. So if the UK products are more attractive for
the US, then the demand for the UK pound will increase, at the same time the demand for the
US dollars in the UK will decrease and these two factors combined will work to decrease the
value of the US dollar relative to the British pound.

Interest Rate
Imagine the scenario when the interest rates of both nations were equal. And suddenly the
interest rates of the US increase. This would make the British pound less attractive for the
American investors and businessmen and they will realize that they can make more money
because of high money market yields and reduce their investments in the UK. Also, the
British would increase their supply of pounds to sell as they would want to have more bank
deposits in the US banks. Having these two factors, the US dollars will prevail in the value in
comparison to the British pounds.

Income Levels
Suppose that salaries and total income of Americans increase. This would result in an
increase in the quantities of all goods bought by them, including the British products as well.
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Because Americans would want more British products due to the fact that they have more
purchase power and more money, British pound would increase in value relative to the dollar.
The reason for this is that the level of supply of British pounds would not change by the
income level increase in the United States.

Government Control
Governments of both nations can result in the change of currencies. They can affect the
currency rate by implementing policies that affect the businesses and investments.
They could impose foreign exchange barriers, trade barriers and also intervene in the markets
of foreign exchange that would in fact affect the inflation and income levels as well.

Expectations
Investors rely on calculations and research. If they can predict that Russian ruble will see an
increase in the future, they will invest in Ruble before the change in the price occurs, and
many other businesses and investors can foresee that change. Even if the expected changes do
not happen, the Russian currency will still see an increase due to the investment made by
foerign investors.

International Payment Methods

Prepayment

This method is the most secure for the exporter because they will receive the payment in
advance. Payment has to be done before the shipment under this type of payment or the seller
will not send the goods. If the credit history of the buyer is not known to the seller, they will
usually ask for prepayment. However, it is risky for the importer as the exporter may delay or
not send the goods at all due to many other factors. Under this method the buyer can send
money through international wire transfer.

Letter of Credit

Letter of credit is the document promising that the money for the goods will be issued by the
bank of the importer once the document proving the shipment has been received by the bank.
Because both the importer and exporter trust the banks more than organizations that they are
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dealing with, the letters of credit seem to be a very attractive method of doing international
trade.

Drafts

Drafts or so-called bills of exchange are a written instruction of how to the exporter at a given
date. It may be before the shipment, after the shipment or at any future date. It is slightly
risky for the exporter as there are no banks that take the responsibility of the payment on
importer’s behalf. There are many conditions of the draft, for example, it could be a sight
draft, when the exporter is paid after the shipment and the documents proving the shipment
are sent to the importer and they are presented the bill of payment. Draft has also a maturity,
meaning that exporters rely on the credit history and trustworthiness of the importer so that
they can first receive the goods and send money after realizing goods in the market.

Consignments

Under the consignment method, the exporter still has the rights for the shipped products even
after goods are received by the importer. Importers can make the payment after they have
sold goods in the market or to a third party. It is very risky for the exports because there are
no banks involved and everything relies on the integrity of the importer. Usually this type of
contract is made between the parent company and the subsidiary, in other words, when the
two companies have a history of doing business and can rely on each other to some extent.

Open Account

This payment method is mostly practiced in North America and in some European countries.
Under this type of payment, the exporter relies on the credit history and overall history of
doing business with the importer. Even if it is risky, it is used quite often, and again, it can
only be used when two companies totally trust each other and have a long history of
cooperation.

International Trade Risks

Credit risk is one of the issues that need to be dealt with while doing international trade.
Collecting your accounts receivables is significant for the business, but companies need to be
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careful. To ensure they receive their payment on time, they might use prepayment methods of
doing international trade or letters of credit from the importer's bank, as they tend to be the
most secure methods of receiving the payment.

Also, the currency exchange rate must be carefully studied.“This usually concerns the
accounts payable and receivable for contracts that are, or soon would be, in force. Foreign
exchange rates are in flux constantly. Hence, businesses would be forced to make
conversions of the funds generated overseas at rates lower than what is budgeted. “
(Vineyard, 2019). There are several ways of analyzing currency exchange and avoiding big
losses. They are as follows: to make the profit margin stable in equilibrium with sales margin,
improving cash flows and simplifying the price both domestically and foreign.

Shipping is one of the riskiest parts of international trade. There are many cases where the
business suffered from force majeure situations. Therefore, businesses can prevent or reduce
these risks by improving their approach to payments. One of the best payment methods for
exporters is prepayment, where the payment is done before the shipment. Or, letter of credit
could be collected from the importer's bank, which obliges the bank to take care of the
payment once shipment is made.

Finally, there are risks associated with the country’s political situation. For example, the
government of a certain country that business is buying products from can make it more
expensive to trade with them. It could be done by implementing trade barriers or tariffs on
foreign products. Also, corruption is a huge problem. “There is no standard of business
conduct that applies to all countries. A business practice that is perceived to be unethical in
one country may be considered totally ethical in another. Most U.S.-based MNCs are well
aware that certain business practices that are accepted in some less developed countries are
illegal in the United States. For example, bribes to governments in order to receive special tax
breaks or other favors are common in some countries.” (Maduro, 2016). There are almost no
ways to deal with corruption and therefore many developing countries struggle to do
international business.

Foreign Direct Investment

Direct investment made in the foreign country has huge benefits for a good number of
companies. Companies usually focus on the countries where they notice a growth in economy
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and the demand for goods and services. For example, the increase in the income can be a
reason for companies to think about FDI as higher income triggers higher consumption.

Foreign direct investment can be a good chance to enter new markets and sell goods there,
increasing company’s revenue and considering expanding in foreign countries. Moreover, by
entering a new market and offering goods that are not yet available in that market, companies
may have a chance of becoming a monopoly.

Some developing countries have relatively low prices for goods and labor and this gives
foreign companies from developed countries an opportunity to achieve economies of scale.
By buying huge amounts of goods for a low price, they realize them at domestic markets at a
cheaper price than their competitors and still get good profits.

Multinational companies can use the foreign labor and technical skills of local workers for
much cheaper wages than in their home country. This gives them an advantage over their
competitors and saves them money. However, the host country may impose some barriers
that will cause some problems for the companies engaged in FDI. When the host country
finds that foreign country is competing with the domestic country, the government will try to
intervene and make conditions to do business more favourable for the domestic companies.
Also, the government closely monitors foreign companies on environmental effects of their
production and if they find any breach of regulations, they impose sanctions and penalties.

Works cited

Madura, Jeff. 2016. International Financial Management. 13th edition. Cengage Learning. Canada.

Vineyard, Jared. 2019. 6 Risks in International Trade & How to Manage Them. Universal Cargo.

https://www.universalcargo.com/6-risks-in-international-trade-how-to-manage-them/