Risk analysis

and risk management

in international trade
By Nguyen Diep Ha

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 Different forms of risk

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 Product risk - Analysis
Product risks are risks that the seller automatically has
to accept as an integral part of their commitment

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 Product risk - Management
• Payment schedule

• Cargo insurance

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 Commercial risk - Analysis
• Commercial risk, a.k.a. purchaser risk or default risk, is the
risk of the buyer incapable of fulfilling the contractual
obligations.
• How to evaluate
– If buyer from OECD countries, seller can get a business
credit report from

– If buyer from non-OECD, the matter becomes more

complicated. Still, seller can get information

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 Commercial risk - Management
• Commercial risk can also be managed via
security enhancement

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 Political risk - Analysis
• Political risk refers to the risk of a separate
commercial transaction not being realized in a
contractual way due to government or
authority’s decisions.

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 Political risk - Management
• Export credit insurance

• The force majeure clauses

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 Adverse business risk
• Adverse business risk refers to the type of risk
involved in all business practices which are
negative nature but common in some parts of
the world: bribery, corruption, money
laundering, illegal activities…..
• Conduct a thorough due diligence process:

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 Currency risk
• Exposure to exchange rate fluctuations comes
in three forms:
– Transaction exposure
– Economic exposure
– Translation exposure

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 Currency risk
• Transaction exposure. the value of future foreign
cash transactions in terms of domestic currency
can be affected by exchange rate fluctuations
• Economic exposure a firm’s present value can be
influenced by changes in operating cash flows as
exchange rate fluctuations can affect firm’s
product competitiveness.
• The exposure of the MNC’s consolidated
financial statements to exchange rate
fluctuations is known as translation exposure.
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Transaction exposure management
• Hedging
• Other alternatives
– Leading and Lagging
– Currency diversification
– Reinvoicing
– Parallel loans
– Currency swap

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 Hedging techniques
1. Forward (future) hedge,
2. Money market hedge,
3. Currency option hedge.

Assuming today, Boeing sells a Boeing 747 to British

Airlines for £10m payable in 1 year in Dec 2014.
– US market rate: 6,1%
– UK market rate: 9%
– Spot rate: 1.500$ = 1£
– 1-year forward rate: 1.460$ = 1£
– Dec future contract is priced at 1.454$ = 1£
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 Forward

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 Future vs. Forward
• Pros:

• Cons:

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 Money market hedge
• Set up the hedge

• Cash Flow

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 Option
• A put or a call?

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 Firm’s choice

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 Other alternatives
• Leading and lagging
– Adjust the timing of payment in accordance with expectation of
exchange rate movements

• Cross-hedge:

• Currency diversification

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 Other alternatives
• Parallel loans: no need to use the foreign exchange market

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 Other alternatives
• Currency swaps: like parallel loans but it does not appear
on the balance sheet

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 Other alternatives
• Reinvoicing center: cost-benefit analysis

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 Other risks
• Other financial risks may include
– Liquidity risk
– Market risk: interest rate risk, …..
– Credit risk
– Operational risk: fraudulent documents, model
risk….

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