intfin 6-11

Front: Why does lower credit quality increase a firm’s cost of debt?

Back: Proper answer: A borrower’s cost of debt equals the risk-free rate plus a credit risk premium. Lower credit quality increases the premium because lenders require compensation for higher default risk. | Simple explanation: Riskier borrowers have to pay extra interest because lenders are less confident they will be repaid. | Example: If the risk-free rate is 4% and the firm’s credit premium is 3%, its cost of debt is 7%. | Common mistake: Do not say the risk-free rate changes because the borrower is risky; the borrower-specific part is the credit risk premium.

Front: Why are lower-credit-quality borrowers often limited to floating-rate loans?

Back: Proper answer: Lenders are less willing to accept both credit risk and interest rate risk, so floating-rate loans shift repricing risk onto the borrower. | Simple explanation: The bank already worries the borrower might not repay, so it does not also want to be stuck with a bad fixed rate if market rates rise. | Example: A weaker firm may be offered LIBOR + 3% rather than a long-term fixed-rate loan. | Common mistake: Do not say floating-rate loans are always cheaper; they can become expensive if rates rise.

Front: How should a borrower hedge a future floating interest payment using interest rate futures?

Back: Proper answer: A borrower who fears rising interest rates should sell interest rate futures, taking a short position. | Simple explanation: If rates rise, futures prices fall. A short futures position gains value and helps offset the higher loan interest. | Example: A company with a future floating-rate payment sells futures now; if rates rise, it earns a futures profit. | Common mistake: Do not buy futures for this exposure. Buying futures helps someone worried about falling rates on future interest earnings.

Front: Why do interest rate futures prices move opposite to interest rates?

Back: Proper answer: Interest rate futures are priced so that a higher implied yield corresponds to a lower futures price, commonly using the rule yield = 100 minus futures price. | Simple explanation: When rates go up, the futures price goes down. | Example: If the futures price falls from 95 to 94, the implied yield rises from 5% to 6%. | Common mistake: Do not assume a higher interest rate means a higher futures price.

Front: What does a forward rate agreement (FRA) achieve for a firm?

Back: Proper answer: An FRA locks in an interest rate today for a borrowing or lending period that begins at a future date. | Simple explanation: It lets the firm remove uncertainty about a future interest rate before the loan or deposit period starts. | Example: A firm needing a 3-month loan in 2 months can use an FRA to lock the rate now. | Common mistake: Do not confuse an FRA with a currency forward; an FRA is about interest rates, not exchanging currencies.

Front: How does a pay-fixed, receive-floating interest rate swap turn floating debt into fixed debt?

Back: Proper answer: The firm receives a floating rate from the swap, which offsets the floating rate it pays on its loan, while it pays a fixed swap rate instead. | Simple explanation: The floating part cancels out, leaving the firm with a known fixed interest cost plus its credit spread. | Example: Debt = LIBOR + 1.25%; swap = receive LIBOR and pay 3.85%; final cost = 1.25% + 3.85% = 5.10%. | Common mistake: Do not forget the credit spread remains payable; the swap usually cancels only the floating reference-rate component.

Front: Why might a firm use an interest rate swap instead of refinancing the debt directly?

Back: Proper answer: A swap can alter fixed/floating exposure without issuing new debt, paying new origination costs, or changing the original borrowing contract. | Simple explanation: It is often faster and cheaper to change the interest-rate exposure with a derivative than to replace the loan. | Example: A firm keeps its floating loan but enters a swap to create fixed payments. | Common mistake: Do not assume swaps eliminate debt; they change the cash flow pattern attached to the debt.

Front: Why would a multinational swap interest payments from one currency into another?

Back: Proper answer: A currency swap can match debt-service outflows with operating cash inflows in the same currency, reducing currency mismatch. | Simple explanation: If the firm earns USD, it may prefer to make debt payments in USD too. | Example: A firm with GBP interest payments but USD revenue may swap GBP payments into USD payments. | Common mistake: Do not treat this as speculation if the purpose is matching currency cash flows.

Front: Why is purchasing power parity (PPP) weak for short-term exchange rate forecasting?

Back: Proper answer: PPP focuses mainly on inflation differences, but short-term exchange rates are also affected by capital flows, interest rates, political events, speculation, liquidity, and market noise. | Simple explanation: Prices matter long term, but currencies can move for many other reasons in the short term. | Example: A country may have higher inflation but its currency can still rise temporarily if investors rush into its bonds. | Common mistake: Do not say PPP is useless; it is more useful as a long-run guide than a short-run forecast.

Front: How does the balance of payments approach explain exchange rate movements?

Back: Proper answer: It argues that exchange rates are influenced by currency flows from current account and financial account transactions. | Simple explanation: If more money flows into a country than out, demand for its currency tends to rise. | Example: Strong foreign investment inflows into Australia can increase demand for AUD. | Common mistake: Do not ignore the weakness: this approach focuses on flows and underplays stocks of money and financial assets.

Front: Why is the asset market approach often more useful than the BOP approach for modern exchange rates?

Back: Proper answer: The asset market approach recognises that currencies are heavily driven by investor demand for financial assets, based on returns, risk, liquidity, growth, and political safety. | Simple explanation: Currencies move because investors decide where they want to hold wealth. | Example: If US real interest rates rise, global investors may buy USD assets, increasing demand for USD. | Common mistake: Do not only discuss imports and exports; modern currency markets are strongly affected by portfolio and capital-market decisions.

Front: What is the key difference between the BOP approach and the asset market approach?

Back: Proper answer: The BOP approach focuses on trade and capital flows, while the asset market approach focuses on investor willingness to hold financial assets denominated in a currency. | Simple explanation: BOP asks where money is flowing; asset market asks why investors want that country’s assets. | Example: A country may have a trade deficit but still have a strong currency if investors strongly demand its bonds and shares. | Common mistake: Do not treat the two approaches as identical just because both involve capital flows.

Front: How can a central bank directly strengthen its currency?

Back: Proper answer: It can buy its own currency in the foreign exchange market using foreign currency reserves. | Simple explanation: Buying the currency increases demand for it, which can push its value up. | Example: The RBA could buy AUD using USD reserves to support AUD. | Common mistake: Do not say the central bank sells its own currency to strengthen it; selling would usually weaken it.

Front: How does indirect currency intervention work?

Back: Proper answer: Indirect intervention changes economic or financial conditions, such as interest rates, to influence capital flows and currency demand. | Simple explanation: Instead of buying the currency directly, the central bank changes incentives for investors. | Example: Raising interest rates can attract foreign capital and support the currency. | Common mistake: Do not confuse direct intervention with indirect intervention; direct uses FX buying/selling, indirect changes fundamentals.

Front: Why can currency intervention fail?

Back: Proper answer: Intervention can fail if market pressure is too strong, reserves are insufficient, investors doubt policy credibility, or the currency is fundamentally misaligned. | Simple explanation: A central bank may not have enough power or credibility to fight the market. | Example: Thailand used reserves to defend the baht in 1997 but eventually had to let it float. | Common mistake: Do not assume central banks can always control exchange rates permanently.

Front: What caused the Asian Financial Crisis to spread beyond Thailand?

Back: Proper answer: Contagion caused investors to sell currencies of other countries they viewed as similar or vulnerable, spreading pressure across the region. | Simple explanation: Once investors panicked about Thailand, they became scared of nearby economies too. | Example: The baht collapse was followed by pressure on currencies such as the Indonesian rupiah and Malaysian ringgit. | Common mistake: Do not explain contagion as a purely trade-based effect; it is largely investor perception and capital flight.

Front: Why did Argentina’s fixed exchange rate system collapse?

Back: Proper answer: The peso’s one-to-one peg to the US dollar became unsustainable because the peso was overvalued, monetary policy flexibility was lost, recession worsened, deficits grew, and bank runs developed. | Simple explanation: Argentina locked its currency to the USD, but the economy became too weak to support that promise. | Example: The peg helped fight inflation at first but later made adjustment difficult during recession. | Common mistake: Do not say fixed exchange rates always fail; the issue is whether the peg is credible and economically sustainable.

Front: How should you explain short-term noise versus long-term fundamentals in exchange rates?

Back: Proper answer: Long-term exchange rates may move toward fundamental values, but short-term rates can deviate due to speculation, shocks, institutional frictions, and technical trading. | Simple explanation: The long-run trend may make sense, but the short run can look messy. | Example: PPP may suggest depreciation over time, but a currency can appreciate short term due to investor optimism. | Common mistake: Do not expect parity conditions to predict every short-term movement.

Front: Why is transaction exposure easier to measure than operating exposure?

Back: Proper answer: Transaction exposure arises from existing foreign-currency contracts, so the currency amount, timing, and settlement obligation are usually known. | Simple explanation: You already know what money is coming in or going out, so you can calculate the risk more clearly. | Example: A firm knows it will receive USD 1 million in 90 days. | Common mistake: Do not confuse transaction exposure with general future business risk; it is tied to existing obligations.

Front: What is the difference between transaction exposure, translation exposure, and operating exposure?

Back: Proper answer: Transaction exposure concerns existing foreign-currency cash flows; translation exposure concerns accounting conversion of foreign subsidiary statements; operating exposure concerns future competitiveness and firm value. | Simple explanation: One is contract cash flow, one is accounting, one is long-term business impact. | Example: USD invoice due in 90 days = transaction; converting a Japanese subsidiary’s balance sheet = translation; losing export customers due to a strong AUD = operating. | Common mistake: Do not say all foreign exchange exposure directly affects cash flow; translation exposure may be accounting-based.

Front: How should a firm hedge a foreign currency receivable with options?

Back: Proper answer: A firm with a foreign currency receivable should buy a put option, giving it the right to sell the foreign currency at a minimum exchange rate. | Simple explanation: If you will receive foreign money, you fear it falling, so you protect the selling price. | Example: An Australian exporter expecting USD buys a USD put to protect the AUD value of the future USD receipt. | Common mistake: Do not buy a call for a receivable; calls are usually for protecting payables.

Front: How should a firm hedge a foreign currency payable with options?

Back: Proper answer: A firm with a foreign currency payable should buy a call option, giving it the right to buy the foreign currency at a maximum exchange rate. | Simple explanation: If you need to pay foreign money later, you fear it becoming more expensive. | Example: An Australian importer owing USD buys a USD call to cap the AUD cost of buying USD. | Common mistake: Do not buy a put for a payable; a put protects the sale of foreign currency, not the purchase.

Front: Why might a firm choose an option hedge instead of a forward hedge?

Back: Proper answer: An option hedge protects against downside risk while preserving upside potential, whereas a forward hedge locks in both gains and losses. | Simple explanation: Options give protection plus flexibility, but forwards give certainty. | Example: A seller can use a put option to guarantee a minimum exchange rate while still benefiting if the currency strengthens. | Common mistake: Do not forget the option premium; the flexibility is not free.

Front: Why do firms often dislike paying for currency options?

Back: Proper answer: Options require an explicit premium, while forwards usually do not require an upfront cash payment even though they still have an economic cost. | Simple explanation: The option feels expensive because the firm sees the cost immediately. | Example: A firm may prefer a forward because it avoids paying a visible option premium today. | Common mistake: Do not say forwards are costless; their cost is embedded in the forward rate and credit usage.

Front: How does a money market hedge work for a foreign currency receivable?

Back: Proper answer: The firm borrows the present value of the foreign currency receivable, converts it to home currency today, and repays the foreign loan using the future receivable. | Simple explanation: Turn future foreign cash into home cash today by borrowing against it. | Example: If a firm will receive £1,000,000 in 90 days, it borrows the present value of £1,000,000 now and repays with the receipt later. | Common mistake: Do not borrow the full future amount; borrow the present value that will grow to the receivable amount.

Front: What is the difference between a hedge and speculation?

Back: Proper answer: A hedge reduces or offsets an existing exposure, while speculation creates or increases exposure to profit from expected market movements. | Simple explanation: Hedging is protection; speculation is betting. | Example: Using a forward to lock in a known USD receivable is hedging. Buying USD forwards without any USD exposure is speculation. | Common mistake: Do not judge by the instrument alone; the same derivative can be a hedge or speculation depending on the purpose.

Front: What is the difference between a natural hedge and a financial hedge?

Back: Proper answer: A natural hedge uses offsetting operating cash flows, while a financial hedge uses financial contracts or debt instruments to offset risk. | Simple explanation: Natural hedge comes from the business itself; financial hedge comes from finance tools. | Example: USD revenue used to pay USD supplier costs is a natural hedge; a USD forward contract is a financial hedge. | Common mistake: Do not call every hedge a derivative; natural hedges may not involve derivatives.

Front: Why can hedging improve firm value even if it does not increase expected cash flows?

Back: Proper answer: Hedging can reduce cash flow volatility, improve planning, and lower the probability of financial distress, which may support firm value. | Simple explanation: Even if average cash flow is the same, safer cash flows can be useful. | Example: A firm with stable cash flows is less likely to miss debt payments during bad exchange rate movements. | Common mistake: Do not say hedging always increases value; it has costs and depends on the firm’s situation.

Front: Why is operating exposure more difficult to measure than transaction exposure?

Back: Proper answer: Operating exposure depends on uncertain future changes in sales volume, prices, costs, competitor reactions, and market conditions caused by unexpected exchange rate changes. | Simple explanation: It is about how the whole business may change in the future, not just one invoice. | Example: A stronger AUD may reduce overseas demand for Australian exports, but the size of the effect depends on customer and competitor behaviour. | Common mistake: Do not calculate operating exposure only from current contracts; that is transaction exposure.

Front: Why does operating exposure focus on unexpected exchange rate changes?

Back: Proper answer: Expected exchange rate changes should already be reflected in budgets, prices, debt planning, investor expectations, and market value. | Simple explanation: Only surprises change the business value because expected changes should already be planned for. | Example: If everyone expects AUD to fall next year, firms may already adjust prices and budgets before it happens. | Common mistake: Do not include every exchange rate movement; exam answers should highlight unexpected changes.

Front: How can exchange rate changes affect operating exposure through sales volume?

Back: Proper answer: Currency movements can change a firm’s price competitiveness, causing customers to buy more or less and changing future sales volume. | Simple explanation: If your currency gets stronger, your goods may look more expensive overseas, so customers may switch away. | Example: An AUD appreciation makes Australian exports more expensive to US buyers, potentially reducing sales volume. | Common mistake: Do not only discuss price; volume and market share are often the bigger operating exposure effects.

Front: How can exchange rate changes affect operating exposure through costs?

Back: Proper answer: Exchange rate changes alter the home-currency cost of imported inputs, foreign labour, sourcing, and production. | Simple explanation: A weaker home currency can make imported materials more expensive. | Example: If an Australian firm buys components in USD and AUD depreciates, its AUD input costs rise. | Common mistake: Do not only focus on revenue; costs can create major operating exposure too.

Front: Why do competitor reactions matter for operating exposure?

Back: Proper answer: Exchange rate changes alter relative competitiveness, and competitors may adjust prices, sourcing, or production, affecting the firm’s future cash flows. | Simple explanation: Your currency movement affects you and your rivals, so the final impact depends on how everyone reacts. | Example: If Japanese competitors become cheaper after yen depreciation, an Australian firm may lose market share. | Common mistake: Do not assume the firm’s cash flows change in isolation; competitor response is central.

Front: What is the difference between short-run and long-run operating exposure?

Back: Proper answer: In the short run, prices and volumes may be fixed by contracts; in the long run, prices, volumes, suppliers, production locations, and competitors can adjust. | Simple explanation: Short run is sticky; long run is flexible. | Example: A firm may not change prices immediately after a currency move, but over years it may move production overseas. | Common mistake: Do not assume firms can instantly adjust all prices and production decisions.

Front: How does matching currency cash flows reduce operating exposure?

Back: Proper answer: It creates foreign currency outflows to offset foreign currency inflows, reducing the net exposure to that currency. | Simple explanation: Earn and spend in the same currency so exchange rate changes hurt less. | Example: A firm earning USD revenue borrows in USD, using USD inflows to service USD debt. | Common mistake: Do not call this perfect risk elimination; timing and amount mismatches can still exist.

Front: How do risk-sharing agreements manage operating exposure?

Back: Proper answer: Risk-sharing agreements allow buyer and seller to split the impact of exchange rate movements through contract terms. | Simple explanation: Instead of one side taking all the currency pain, both sides share it. | Example: A buyer and seller agree to adjust the invoice price if the exchange rate moves outside a set band. | Common mistake: Do not confuse risk sharing with a forward contract; it is an operating/contractual arrangement between trading partners.

Front: Why can diversified operations help manage operating exposure?

Back: Proper answer: Internationally diversified production, sourcing, sales, and financing give management flexibility to respond when exchange rate disequilibrium creates cost or competitiveness changes. | Simple explanation: If one country becomes expensive, the firm can shift production, sourcing, or marketing elsewhere. | Example: A multinational increases production in a country whose currency has depreciated and costs have fallen. | Common mistake: Do not say diversification requires predicting exchange rates perfectly; it helps the firm react after changes occur.

Front: How does the OLI paradigm explain why firms choose FDI?

Back: Proper answer: FDI is likely when a firm has ownership advantages, the foreign market has location advantages, and internalisation is better than licensing or outsourcing. | Simple explanation: A firm invests overseas when it has something valuable, the location is attractive, and it wants control. | Example: A car company builds a foreign factory because it has technology, the country has cheap skilled labour, and it wants to control quality. | Common mistake: Do not define O, L, and I separately without explaining how together they justify FDI.

Front: What makes an ownership advantage strong enough to support FDI?

Back: Proper answer: It should be firm-specific, transferable abroad, valuable, and difficult for competitors to copy. | Simple explanation: The firm needs a special strength that can survive in another country. | Example: A patented production process or strong global brand can support FDI. | Common mistake: Do not list generic advantages that any firm could have; ownership advantages must be firm-specific.

Front: Why might a firm choose FDI rather than licensing?

Back: Proper answer: FDI allows the firm to protect proprietary knowledge, maintain quality control, control the value chain, and capture more profit. | Simple explanation: Licensing is easier, but the firm gives up control. | Example: A luxury brand may avoid licensing production overseas because poor quality could damage its reputation. | Common mistake: Do not say licensing has no benefits; it can be lower cost and lower risk, but with less control.

Front: What is the trade-off between exporting and FDI?

Back: Proper answer: Exporting usually requires less investment and faces fewer unique political risks, while FDI gives deeper market presence and control but requires more capital and risk. | Simple explanation: Exporting is lighter and safer; FDI is bigger and more committed. | Example: A firm may start by exporting, then build a factory overseas once demand is proven. | Common mistake: Do not assume FDI is always better; it depends on market size, costs, control needs, and risk.

Front: When is a joint venture useful compared with a wholly owned subsidiary?

Back: Proper answer: A joint venture is useful when a local partner provides local knowledge, contacts, management, technology, legitimacy, or helps satisfy local ownership rules. | Simple explanation: A local partner can help the foreign firm understand and operate in the market. | Example: A firm enters China with a local partner who understands regulators and distribution networks. | Common mistake: Do not say joint ventures automatically reduce political risk; the wrong partner can increase it.

Front: Why can joint ventures create conflict?

Back: Proper answer: Partners may disagree about dividends, financing, transfer pricing, disclosure, control, reinvestment, and global production strategy. | Simple explanation: Two owners may want different things from the same business. | Example: The local partner wants dividends now, while the multinational wants to reinvest profits for growth. | Common mistake: Do not only list advantages; exam answers often ask for balanced comparison.

Front: What is political risk in international finance?

Back: Proper answer: Political risk is the possibility that political events or government actions affect the economic wellbeing of a firm operating in a foreign country. | Simple explanation: It is the risk that politics damages profits, cash flows, or ownership. | Example: A government changes regulations so a foreign firm can no longer operate profitably. | Common mistake: Do not limit political risk to war; regulation, transfer restrictions, and expropriation are also political risks.

Front: How do firm-specific and country-specific political risks differ?

Back: Proper answer: Firm-specific risks affect a particular firm or project, while country-specific risks arise from the broader host-country environment and can affect many firms. | Simple explanation: Micro risk hits one company; macro risk comes from the country setting. | Example: A cancelled licence for one mining company is firm-specific; national capital controls are country-specific. | Common mistake: Do not classify risk by severity; classify it by whether it targets the firm or comes from the country environment.

Front: What is transfer and convertibility risk?

Back: Proper answer: Transfer risk is the risk that money cannot be moved out of the host country; convertibility risk is the risk that local currency cannot be exchanged into foreign currency. | Simple explanation: The firm may have money overseas but be unable to bring it home or convert it. | Example: A subsidiary earns profits locally, but government rules prevent conversion into USD and remittance to the parent. | Common mistake: Do not treat blocked funds as an accounting issue only; it can directly affect cash flow.

Front: Why is creeping expropriation often more realistic than outright expropriation?

Back: Proper answer: Governments may gradually reduce firm value through regulations, restrictions, taxes, forced local sourcing, or interference instead of immediately seizing assets. | Simple explanation: The government slowly squeezes the firm rather than taking it all at once. | Example: A government imposes price controls, local hiring rules, and profit remittance restrictions until the investment becomes unattractive. | Common mistake: Do not only mention nationalisation; creeping expropriation is a common exam trap.

Front: How can gradual investing reduce political risk?

Back: Proper answer: Gradual investing commits capital in stages, limiting exposure until the firm learns more about the host-country environment and government behaviour. | Simple explanation: Do not put all your money in before knowing whether the country will treat you fairly. | Example: A firm builds a small facility first, then expands using retained earnings if conditions remain stable. | Common mistake: Do not say gradual investing removes political risk; it reduces the amount at risk early on.

Front: What is the basic trust problem in international trade finance?

Back: Proper answer: The seller wants payment before shipping, while the buyer wants goods before paying, creating risk because the parties are in different countries and may not know each other well. | Simple explanation: Both sides are scared the other side will not do their part. | Example: A seller fears shipping goods and not being paid; a buyer fears paying and not receiving goods. | Common mistake: Do not frame trade finance as only a borrowing issue; it is also about trust and risk allocation.

Front: How does a letter of credit reduce risk in international trade?

Back: Proper answer: A letter of credit is a bank’s conditional promise to pay the seller if the seller presents the required documents. | Simple explanation: The seller trusts the bank’s promise instead of relying only on the buyer. | Example: The buyer’s bank pays the seller after receiving documents proving shipment. | Common mistake: Do not say the bank guarantees the physical quality of the goods; banks deal with documents.

Front: Why is an L/C separate from the underlying sales contract?

Back: Proper answer: The bank’s obligation under the L/C depends on whether the required documents comply with the L/C, not whether the goods themselves are satisfactory under the sales contract. | Simple explanation: The bank checks paperwork, not the actual shipment quality. | Example: If documents match the L/C, the bank may pay even if the buyer later complains about product quality. | Common mistake: Do not assume the L/C solves every commercial dispute between buyer and seller.

Front: What are the three parties to a letter of credit and their roles?

Back: Proper answer: The applicant is the buyer who requests the L/C; the issuing bank promises payment; the beneficiary is the seller who receives payment if conditions are met. | Simple explanation: Buyer asks, bank promises, seller gets paid. | Example: Importer = applicant; importer’s bank = issuing bank; exporter = beneficiary. | Common mistake: Do not call the seller the applicant; the buyer applies for the L/C.

Front: How are a letter of credit and a draft linked?

Back: Proper answer: The L/C states the conditions under which the bank promises to honour a draft drawn on that bank. | Simple explanation: The L/C is the promise; the draft is the payment order. | Example: The seller presents a draft with shipping documents, and the bank pays if the L/C conditions are satisfied. | Common mistake: Do not treat the L/C and draft as the same document.

Front: What is the difference between a sight draft and a time draft?

Back: Proper answer: A sight draft is payable immediately when presented, while a time draft is payable at a specified future date. | Simple explanation: Sight = pay now; time = pay later. | Example: A 90-day time draft is paid 90 days after acceptance or sight, depending on terms. | Common mistake: Do not assume all drafts are paid immediately.

Front: Why is a banker’s acceptance useful in trade finance?

Back: Proper answer: A banker’s acceptance substitutes the bank’s credit for the buyer’s credit and creates a negotiable instrument that can be sold or discounted. | Simple explanation: The bank’s promise makes the payment claim easier and cheaper to finance. | Example: An exporter can sell a bank-accepted time draft before maturity to get cash sooner. | Common mistake: Do not confuse a banker’s acceptance with a normal invoice; it is bank-backed and negotiable.

Front: What are the three functions of a bill of lading?

Back: Proper answer: A bill of lading acts as a receipt for goods, a contract of carriage, and a document of title. | Simple explanation: It proves the goods were received for shipping, sets shipping terms, and can control ownership. | Example: The seller presents an order bill of lading to show goods were shipped and to transfer control. | Common mistake: Do not describe it only as a shipping receipt; the document-of-title role is exam-important.

Front: How do currency risk and risk of noncompletion differ in trade finance?

Back: Proper answer: Currency risk is the risk that exchange rates change before payment; noncompletion risk is the risk that one party fails to ship, pay, or complete the transaction. | Simple explanation: Currency risk is about exchange rates; noncompletion is about the deal not being finished properly. | Example: A US seller invoiced in euros faces currency risk; a buyer refusing to pay after shipment is noncompletion risk. | Common mistake: Do not merge them into one risk; they are managed with different tools.

Front: Why might an exporter use factoring?

Back: Proper answer: Factoring allows the exporter to sell receivables to a factor, shifting collection responsibility and potentially credit/political risk, especially on a nonrecourse basis. | Simple explanation: The exporter gets cash and lets another firm handle collecting the money. | Example: A small exporter sells foreign receivables to a factor instead of chasing many overseas customers. | Common mistake: Do not assume factoring is free; it can be costly but useful when collection risk is hard to manage internally.

Front: What makes forfaiting different from ordinary factoring?

Back: Proper answer: Forfaiting is the non-recourse sale of medium- to long-term, usually bank-guaranteed export receivables, often used for higher-risk importers or countries. | Simple explanation: It is like selling longer-term risky export payment claims so the exporter removes nonpayment risk. | Example: An exporter sells a bank-guaranteed promissory note from a risky foreign buyer to a forfaiter without recourse. | Common mistake: Do not use forfaiting for every small short-term receivable; it is more specialised and longer term.

Front: Why do governments provide export finance and credit insurance?

Back: Proper answer: Governments support exporters by helping them offer competitive credit terms and by reducing credit or political risk that private markets may price too highly. | Simple explanation: It helps domestic firms win foreign sales. | Example: A government export agency insures an exporter against nonpayment by a foreign buyer. | Common mistake: Do not ignore the cost: taxpayers effectively support these programs.