2. What is Risk?
Risk is the integral part of all type of business activities, its magnitude becomes high in
international transactions.
• Countries involved parties like exporters and importers
• Involvement of a countries whose credibility and creditworthiness is uncertain.
3. Types Of Risks...
1.Marine Risk
It refers to which the cargo is exposed during transportation of shipment such as fire, storm,
collision, leakage, explosion.
2. Credit Risk
It arises if the buyers is unable to pay or defaults or go bankrupt.
3. Political Risk
It arises from government actions like blocking of payments, imports restrictions, cancellation
of licences, war riots.
4. Exchange Risk
It arises due to fluctuations in exchange rates during the time between the shipment of goods
and payments
4. Transaction
Exposure
Translation
Exposure
Economic
Exposure
It is faced by the
company when there
are changes in
currency rates.
The risk that a
company's equities,
assets, liabilities or
income will change in
value as a result of
exchange rate changes.
It usually affects the
company's cash flow,
foreign investment &
earning due to
fluctuation of foreign
currency exchange
rates.
5. Objectives Of Risk Management
Safeguard Interest
By this risk
management each
company wants to
safeguard in interest &
protest against all
possible risks.
Diversification
A company can diversify
its foreign exchange
risks by adopting a
policy of currency
diversification.
Negotiation
Company should try to
negotiate a lower price
with the foreign
supplier.
6. Objectives Of Risk Management
Best Rates
The company should
buy the currency when
it is the cheapest and
sell it when it is
costliest.
Insurance Cover
The company should
cover against the
unaffordable adverse
exchange risk
management strategy
of talking the insurance
cover.
Exchange Risk
If company is unable to
eliminate the exchange
risks, it should try its
best to avoid exchange.
8. Internal Techniques
• Netting
It is the technique of minimising exchange risk by optimising cash flow movement within
the firm. The basic idea behind netting is to transfer only net amount.
• Matching
It is similar to netting. The foreign exchange risk can be eliminated or reduced if the
company is having the exposure to receipts.
9. • Asset & Liability Management
ALM is the process of adjusting
liability to meet and asset demand,
liquidity needs and safety
requirements.
• Pricing Policies
It is the technique which is used by
the company for the variation in the
invoice amount or contract price.
10. External Techniques
• Forward Contracts
In finance, a forward contract or simply
a forward is a non-standardized
contract between two parties to buy or
to sell an asset at a specified future time
at a price agreed upon today,
15
25
35
• Future Contracts
The future contract is same as forward
contract expect they are standardised in
terms of contract size is traded on
future exchanges and is settled daily.
11. • Short-Term Borrowings
A company can manage the exchange risk by taking the help of short-term borrowings
or talking a foreign loan.
• Risk Sharing
It is contractual arrangement between the parties who agree in advance to share the
foreign exchange risk. This method suggests the establishment of long-term relation
between the parties.