Chapter 6-2 Flashcard

Flashcards about financial risks and mitigation strategies in export markets.

Currency fluctuations

A financial risk that occurs due to regular changes in the exchange rate between two different currencies in a floating exchange rate system.

Non-payment of monies

A financial risk that occurs when an overseas customer fails to pay for goods or services after they have been delivered or dispatched.

Documentation in international trade

Formal written records and contracts that specify the terms, conditions, and responsibilities of both parties involved in an export transaction.

Documentary letter of credit

A document issued by the importer’s bank, guarantees that payment will be made once certain agreed conditions are met.

Documents against payment

Documents where the bank releases the shipping documents to the importer only after full payment is made.

Insurance in export markets

A risk transfer mechanism that compensates businesses for financial loss due to events beyond their control, such as non-payment, political instability, or shipping damage.

Export credit insurance

Covers against buyer default or insolvency.

Political risk insurance

Covers losses from civil unrest, government restrictions, or currency freezes.

Transit (shipping) insurance

Protects against damage or loss of goods while in transit.

Hedging

A financial strategy used to protect against losses from currency fluctuations in international transactions.

Forward exchange contracts

Locks in an exchange rate in advance, which means the exporter knows exactly how much they will receive in local currency, even if the market fluctuates. This helps mitigate the risk associated with changes in exchange rates between the contract signing and the actual transaction.

Option Hedging

A strategy employing options contracts to mitigate potential losses from adverse price movements. Options provide the right, but not the obligation, to buy (call option) or sell (put option) an asset at a predetermined price (strike price) before a specified date (expiration).