Amity Campus Uttar Pradesh India 201303 ASSIGNMENTS PROGRAM MBA IB SEMESTER-III
1. Amity Campus
Uttar Pradesh
India 201303
ASSIGNMENTS
PROGRAM: MBA IB
SEMESTER-III
Subject Name : Risk and Insurance in International
Trade
Study COUNTRY :The Gambia
Roll Number (Reg.No.) : IB01122014-2016023
Student Name :Saikou Saidy Jeng
INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT DETAILS MARKS
Assignment A Five Subjective Questions 10
Assignment B Three Subjective Questions + Case Study 10
Assignment C Objective or one line Questions 10
b) Total weightage given to these assignments is 30%. OR 30 Marks
c) All assignments are to be completed as typed in word/pdf.
d) All questions are required to be attempted.
e) All the three assignments are to be completed by due dates and need to be
submitted for evaluation by Amity University.
f) The students have to attached a scan signature in the form.
Signature :
_________________________________
Date : ___19th
-11-2015______________________________
2. ( â ) Tick mark in front of the assignments submitted
Assignment
âAâ
â Assignment âBâ â Assignment âCâ â
3. Risk and Insurance in International Trade
Assignment A
Answer the following questions:
Q1: Briefly explain what is risk
The term risk is variously defined as (1) the chance of loss, (2)
the possibility of loss, (3) uncertainty, (4) the dispersion of
actual from expected results, or (5) the probability of any
outcome different from the one expected.
A risk is a potential future harm that may arise from some
present action (Wikipedia, 2004), such as a schedule slip or a
cost overrun. The loss is often considered in terms of direct
financial loss, but also can be a loss in terms of credibility,
future business, and loss of property or life.
Risk refers to a situation where outcomes are uncertain. In other
words, risk occurs whenever there is a variation in the actual
outcome and expected value.
Risk is also seen asa condition in which there is a possibility of
an adverse deviation from a desired outcome that is expected or
hoped for.
In Business if there is a variation between the actual and the
expected value, business suffers a loss, therefore the term risk is
also used to describe the expected losses or the variation from
the actual outcome.
4. From the above definitions of risk, we can see that there are two
common elements that come to the fore: indeterminacy and loss.
⢠The notion of an indeterminate outcome is implicit in all
definitions of risk: the outcome must be in question. When risk
is said to exist, there must always be at least two possible
outcomes. If we know for certain that a loss will occur, there is
no risk. Investment in a capital asset, for example, usually
involves a realization that the asset is subject to physical
depreciation and that its value will decline. Here the outcome is
certain and so there is no risk.
⢠At least one of the possible outcomes is undesirable. This may
be a loss in the generally accepted sense, in which something the
individual possesses is lost, or it may be a gain smaller than the
gain that was possible. For example, the investor who fails to
take advantage of an opportunity âlosesâ the gain that might
have been made. The investor faced with the choice between
two stocks may be said to âloseâ if he or she chooses the one
that increases in value less than the alternative.
The above definitions also show that risk is a condition of the
real world; it is a combination of circumstances in the external
environment. Note also that in this combination of
circumstances, there is a possibility of loss. When we say that an
event is possible, we mean that it has a probability between zero
and one; it is neither impossible nor definite. Note also that there
is no requirement that the possibility be measurableâonly that it
must exist. We may or may not be able to measure the degree of
risk, but the probability of the adverse outcome must be between
zero and one.
5. Business organizations are exposed to risk and also to the
associated loss. Various techniques are used to minimize risk.
Whenever an organization strives to minimize risk it has to incur
some cost. Letâs take an example, suppose a business
organization engaged in export feels that the overseas buyer
might not pay therefore he take a insurance cover. Since the
company is dealing with this buyer for the first time therefore it
is not sure of its creditworthiness and intentions to make
payment. The company thus takes insurance for $100,000 by
paying a premium of $1000. If the buyer makes a payment, the
company suffers a loss of $1000 and if the buyer does not make
payment the associated risk is covered through insurance.
Therefore it is clear from the example that to minimize risk
certain cost is involved.
Also enumerate different types of risks and ways of assessing
risk.
Risks can be classified using different dimensions. Some of
these are explained below. On a broader scale, risk may be
classified into two types, viz; business risk and personal risk,
and within these main types we have different types of risks, as
mentioned below.
Business Risk:
This refers to risks faced by business organizations. It is an
axiomatic truth that most of the business organizations have to
constantly face fluctuations in the price of the product or raw
materials, nonpayment by the buyer, changes in interest rate on
loan, suppliers not meeting delivery schedules, consumers
6. switching to the competitors, new entrants in the market, and
change in policy and regulations.
Business risk is therefore classified into following types of risks
;.
Price Risk :
Price risk refers to uncertainty over total of cash flows due to
possible changes in output and input prices. Output price risk
refers to the risk of changes in the prices that a firm can demand
for its goods and services. Input price risk refers to the risk of
changes on the prices that firm must pay for labor, materials and
other inputs to its production process.
Price risk can be classified into commodity price risk, exchange
rate risk, interest rate risk.
Credit Risk:
The second type of business risk is credit risk. A credit risk is
the risk of default on a debt that may arise from a borrower
failing to make required payments. In the first resort, the risk is
that of the lender and includes lost principal and interest,
disruption to cash flows, and increased collection costs. In short,
credit risk is the risk or probable losses that a firm is exposed to
due to delay or nonpayment by the parties to whom it has lend
money.
Pure Risk:
Pure risk is another type of business risk. Pure risk is said to be a
category of risk in which loss is the only possible outcome; there
is no beneficial result. Pure risk is related to events that are
beyond the risk-taker's control and, therefore, a person cannot
consciously take on pure risk. Apart from the price and credit
risk, pure risky situations faced by firms include:
7. 1. The risk of reduction in the value of business assets due to
physical damage, theft, and expropriation.
2. The risk of legal liability for damages for harm to customer
supplier shareholders and other parties.
3. The risk associated with injury, death, illness or disability to
workers
Personal Risk:
Personal risks are risks that directly affect an individual. They
involve the possibility of loss or reduction of income, of extra
expenses, and the elimination of financial assets. Thus, the risk
faced by individuals and families is known as personal risk. An
individual or family is exposed to risk due to following reasons:
⢠Risk arising due to loss of earned income to the family because
of premature death of family head.
⢠Insufficient income and financial assets during retirement.
⢠Loss of earned income from unemployment.
Personal risk is classified into six categories. They are
Earning risk,
Medical expenses,
Liability risk,
Physical asset risk,
Financial asset risk and
Longevity risk.
8. As stated earlier, Risks may be classified in many ways. So risks
may be classified also in the following manner;
Dynamic risks are those resulting from changes in the
economy. Changes in the price level, consumer tastes, income
and output, and technology may cause financial loss to members
of the economy. These dynamic risks normally benefit society
over the long run, since they are the result of adjustments to
misallocation of resources. Although these dynamic risks may
affect a large number of individuals, they are generally
considered less predictable than static risks, since the former do
not occur with any precise degree of regularity.
Static risks involve those losses that would occur even if there
were no changes in the economy. If we could hold consumer
tastes, output and income, and the level of technology constant,
some individuals would still suffer financial loss. These losses
arise from causes other than the changes in the economy, such as
the perils of nature and the dishonesty of other individuals.
Unlike dynamic risks, static risks are not a source of gain to
society. Static losses involve either the destruction of the asset
or a change in its possession as a result of dishonesty or human
failure. Static losses tend to occur with a degree of regularity
over time and, as a result, are generally predictable. Because
they are predictable, static risks are more suited to treatment by
insurance than are dynamic risks.
Fundamental risks involve losses that are impersonal in origin
and consequence. They are group risks, caused for the most part
by economic, social, and political phenomena, although they
may also result from physical occurrences. They affect large
9. segments or even all of the population. Unemployment, war,
inflation, earthquakes, and floods are all fundamental risks.
Since fundamental risks are caused by conditions more or less
beyond the control of the individuals who suffer the losses and
since they are not the fault of anyone in particular, it is held that
society rather than the individual has a responsibility to deal
with them. Although some fundamental risks are dealt with
through private insurance, usually, some form of social
insurance or government transfer program is used to deal with
fundamental risks. Unemployment and occupational disabilities
are fundamental risks treated through social insurance.
Particular risks involve losses that arise out of individual
events and are felt by individuals rather than by the entire group.
They may be static or dynamic. The burning of a house and the
robbery of a bank are particular risks.
Speculative risk describes a situation in which there is a
possibility of loss, but also a possibility of gain. Gambling is a
good example of a speculative risk. In a gambling situation, risk
is deliberately created in the hope of gain. The student wagering
$10 on the outcome of Saturdayâs game faces the possibility of
loss, but this is accompanied by the possibility of gain. The
entrepreneur or capitalist faces speculative risk in the quest for
profit. The investment made may be lost if the product is not
accepted by the market at a price sufficient to cover costs, but
this risk is borne in return for the possibility of profit.
Pure risk is used to designate those situations that involve only
the chance of loss or no loss. One of the best examples of pure
risk is the possibility of loss surrounding the ownership of
10. property. The person who buys an automobile, for example,
immediately faces the possibility that something may happen to
damage or destroy the automobile. The possible outcomes are
loss or no loss.
Risk assessment is the determination of quantitative or
qualitative estimate of risk related to a concrete situation and a
recognized threat . For the most part, these methods consist of
the following elements, performed, more or less, in the
following order.
1. identify, characterize, and assess threats
2. assess the vulnerability of critical assets to specific threats
3. determine the risk (i.e. the expected consequences of
specific types of attacks on specific assets)
4. identify ways to reduce those risks
5. prioritize risk reduction measures based on a strategy
Once risks have been identified, they must then be assessed as to
their potential severity of loss and to the probability of
occurrence.
Some of the ways of assessing business risks and any other type
of risks for that matter include;
PEST analysis-According to Wikipedia, PEST analysis
('Political, Economic, Social and Technological analysis')
describes a framework of macro-environmental factors used in
11. the environmental scanning component of strategic
management. This is a flexible framework which can be
manipulated by adding certain letters to widen the scope, for
example SLEPT, meaning Social, Legal, Environmental,
Political and Technological factors that impact on the business.
SWOT is Another technique for assessing a borrowerâs
competitive position. The method of SWOT analysis is to take
the information from an environmental analysis and separate it
into internal (strengths and weaknesses) and external issues
(opportunities and threats). Once this is completed, SWOT
analysis determines what may assist the firm in accomplishing
its objectives, and what obstacles must be overcome or
minimized to achieve desired results.
Another model enabling the assessment of company risks and
operating risks in the economy is Michael Porterâs Risk
Assessment .This matrix positions a company within its
operational context. The company is surrounded by the
operational elements which can subject its ongoing operations to
risk, namely:
New competitors â any company can lose market share to
competitors and needs to be aware of developments which may
affect it. Market demand for its products â a shift in consumer
perceptions or needs can impact the demand for the companyâs
products.
12. Product substitution is another risk â customers may become
disenchanted with one product and favor an alternative (e.g.
buses instead of trains).
Stable and reasonably priced flow of raw materials necessary to
its manufacturing process is another risk which can impact the
companyâs ongoing operations.
Q2: Explain the meaning and importance of marine insurance.
Marine insurance may be defined as an agreement whereby the
insurer undertakes to indemnify the assured, in the manner and
to the extent the parties agreed, against marine loses, that is to
say, the losses incidental to marine adventure. Though, to begin
with, Marine insurance evolved as a contract insuring ocean
transit of cargoes, overland and air transits also came to be
insured under marine policies, in course of time. Accordingly,
all types of transits, i.e., sea, road, rail, air and registered post
are now insured under marine policies. Therefore, marine
insurance has two main branches:
1. Ocean Marine Insurance.
2. Inland Marine Insurance.
Ocean marine insurance covers the perils of the sea whereas
inland marine insurance is related to the inland risks on the land.
The Marine Cargo business is universal in the sense that the
practice followed by the insurers in the world is more or less
uniform and it reflects the principles and practices prevailing in
the London Market, popularly known as âLLOYDSâ. For
example, the Law of Marine insurance obtaining in UK has been
13. adopted in India and codified as Marine Insurance Act in 1963
and the conduct of marine insurance business is governed by this
Marine Insurance Act and the rules and regulations framed by
respective insurer.
Marine insurance can also be seen from three perspectives;
cargo insurance, hull insurance and freight insurance.
ďˇ Cargo insurance is the insurance of the goods loaded into
the ship for delivery to the party authorized.
ďˇ Hull insurance refers to the insurance of the full body of the
ship against the probable loss caused by any specified
perils during a particular journey or for a certain period of
time.
ďˇ Freight insurance refers to the insurance of the probable
loss of freight charges for the non delivery of goods by
means of any specified sea perils.
To better understand marine insurance, let us look at its features,
as discussed below.
1) Offer & Acceptance:
It is a prerequisite to any contract. Similarly the goods under
marine (transit) insurance will be insured after the offer is
accepted by the insurance company. Example: A proposal
submitted to the insurance company along with premium on
1/4/2011 but the insurance company accepted the proposal on
15/4/2011.
The risk is covered from 15/4/2011 and any loss prior to this
date will not be covered under marine insurance.
2) Payment of premium:
14. An owner must ensure that the premium is paid well in advance
so that the risk can be covered. If the payment is made through
cheque and it is honored then the coverage of risk will not exist.
It is as per section 64VB of Insurance Act 1938- Payment of
premium in advance.
3) Contract of Indemnity:
Marine insurance is contract of indemnity and the insurance
company is liable only to the extent of actual loss suffered. If
there is no loss there is no liability even if there is operation of
insured peril. Example: If the property under marine (transit)
insurance is insured for Rs 20 lakhs and during transit it is
damaged to the extent of Rs 10 lakhs then the insurance
company will not pay more than Rs 10 lakhs.
4. Utmost good faith:
The owner of goods to be transported must disclose all the
relevant information to the insurance company while insuring
their goods. The marine policy shall be voidable at the option of
the insurer in the event of misrepresentation, mis-description or
non-disclosure of any material information. Example: The
nature of goods must be disclosed i.e whether the goods are
hazardous in nature or not, as premium rate will be higher for
hazardous goods.
5) Insurable Interest:
The marine insurance will be valid if the person is having
insurable interest at the time of loss. The insurable interest will
depend upon the nature of sales contract. Example: Mr A sends
the goods to Mr B on FOB( Free on Board) basis which means
the insurance is to be arranged by Mr B. And if any loss arises
15. during transit then Mr B is entitled to get the compensation from
the insurance company Example: Mr A sends the goods to Mr B
on CIF (Cost, Insurance and Freight) basis which means the
insurance is to be arranged by Mr A. And if any loss arises
during transit then Mr A is entitled to get the compensation from
the insurance company.
6) Contribution:
If a person insures his goods with two insurance companies,
then in case of marine loss both the insurance companies will
pay the loss to the owner proportionately. Example; Goods
worth Rs. 50 lakhs were insured for marine insurance with
Insurance Company A and B. In case of loss, both the insurance
companies will contribute equally.
7) Period of marine Insurance:
The period of insurance in the policy is for the normal time
taken for a particular transit. Generally the period of open
marine insurance will not exceed one year. It can also be issued
for the single transit and for specific period but not for more
than a year.
8) Deliberate Act:
If goods are damaged or loss occurs during transit because of
deliberate act of an owner then that damage or loss will not be
covered under the policy.
9) Claims:
To get the compensation under marine insurance the owner must
inform the insurance company immediately so that the insurance
company can take necessary steps to determine the loss.
16. There are various types of marine insurance policies, which
differ in respect of the cover provided to the insured. The main
types are as follows:
i) Floating policy: A floating policy is a contract of insurance
means to cover a number of shipments, the details of which are
not finalized when the insurance contract is concluded. Under
the floating policy, insurance cover is given in general terms and
details of shipments are declared subsequently and endorsed in
the policy.
ii) Time policy: It covers the subject matter of insurance for a
period of time.
iii) Voyage policy: It insures the subject matter from one place to
another irrespective of the length of time taken.
iv) Mixed policy: It covers both a voyage and a period of time
exceeding 30 days.
v) Open cover or Blank policy: This policy is automatically
covers all the shipments of the exporter up to an estimated
amount during a given period.
vi) Specific policy: A specific policy is a contract of insurance,
which covers a specific shipment.
vii) Valued policy: A valued policy is one, which specifies the
agreed value of merchandise insured.
17. viii) Unvalued policy: In this type of policy, the value of the
merchandise insured is not specified. The insurable value of the
goods is ascertained later on subject to the limit of the sum
insured.
Any discussion of the nature of marine insurance would not be
complete without having a go at the type of loss inherent in
marine perils. Literature has it that marine loss can be classified
into the following;
Total Loss
Goods may be totally lost by the operation of the marine peril.
The measure of indemnity in the event of total loss of the goods
is the full insured value. The insurers are entitled to take over
the salvage, if any.
An actual total loss takes place where the subject matter is
entirely destroyed or damaged to such an extent that it is no
longer a thing of the kind insured.
As against actual total loss, a constructive total loss, which is a
commercial total loss, takes place where the subject matter
insured is abandoned on account of the actual total loss being
inevitable, or where the expenditure to be incurred for repairs or
recovery would exceed the value of the subject-matter after the
repairs or recovery.
Particular Average
These are partial losses caused by marine perils. The particular
average losses occur when there is a total loss of part of the
goods covered, e.g., a consignment may consist of 100 packages
of which 5 packages may be lost completely. Another way in
which particular average loss occurs is when there is damage to
the goods. Where whole or any part of the goods insured is
delivered damaged at destination, the percentage of depreciation
18. is ascertained by a surveyor appointed for the purpose, by
comparing on the one hand the gross sound market value and, on
the other, the gross damaged market value on arrival of the
goods at destination.
General Average
General Average is a loss caused by a general average act. An
act is referred to as general average act when an extraordinary
sacrifice or expenditure is made to save the entire ship. Such an
act should be voluntary, and the expenditure reasonable. It
should be undertaken with the sole idea of preserving the
property imperiled in an adventure. Whenever there is a general
average, the party on whom it falls, gets a rateable contribution
known as general average contribution from the other parties,
who are interested in the adventure and who have benefited by
the voluntary sacrifice or expenditure.
Salvage Loss
When the goods insured are damaged during transit, and the
nature of the goods is such that they would deteriorate further
and would be worthless by the time the vessel arrives at
destination, it would be a prudent and sensible way of dealing
with the situation by disposing off the same at an intermediate
port for the best price obtained. The term âsalvage lossâ refers to
the amount payable which is the difference between the insured
value and the net proceeds of the sale. This is a practical method
of settlement.
In summary then, we may state that Marine, or transportation,
insurance provides protection against the loss of goods that are
being shipped from one place to another. It is the oldest type of
insurance, having originated with the ancient Greeks and
19. Romans. The term marine insurance was coined at a time when
only goods transported by ship were insured.
Today marine insurance is available for goods shipped over
water or land. Ocean marine insurance protects the policyholder
against loss or damage to a ship or its cargo on the high seas.
Inland marine insurance protects against loss or damage to
goods shipped by rail, truck, airplane, or inland barge. Both
types cover losses from fire, theft, and most other hazards.
Let us now discuss the importance of marine insurance.
The importance of marine insurance has increased more than
ever before in this age of globalization. The following points
highlight the importance or significance of marine insurance.
1. Marine insurance facilitates global trade
The volume of trade through not only the sea but also through
road, rail and air has tremendously increased, and so has the risk
of loss through these means. Therefore, marine insurance plays
significant role in facilitating the global trade by minimizing the
risk thereof.
2. Marine insurance ensures economic property
The volume of marine insurance business is an indicator of the
economic prosperity of a country. There is a close link between
a sound marine insurance market and industrial development.
3. Marine insurance provides peace of mind
20. Marine insurance provides peace of mind to the businessmen by
meeting their financial losses from marine risks. It helps to
reduce tension and fear, and takes away anxiety from the
businessmen and managers who are in the international
business. As a result, they are able to operate their business
without any tension, fear, anxiety.
4. Marine insurance improves quality of life
Marine insurance helps control losses that may arise from the
marine risks. As a consequence, people are encouraged to
engage more in international business. This means more
investments, more jobs, more production, more income and
more consumption of goods and services which help to improve
the people's quality of life.
5. Marine insurance provides social benefits
Marine insurance helps businessmen to recover funds from a
loss. This keeps the business going, jobs are not lost, and goods
and services continue to be sold. The social benefit of this is that
people do not lose their jobs and their sources of income are
intact. This contributes to the unhindered growth of the national
economy.
6. Generates financial resources
Marine insurance generate funds by collecting premium. These
funds can be invested in government securities and stock. These
funds can be gainfully employed in industrial development of a
country for generating more funds and utilize for the economic
21. development of the country. Employment opportunities are
increased by big investments leading to capital formation.
Besides a number of benefits, marine insurance, just like all
other types of insurance, has also some limitations.
ďˇ Marine insurance can lead to negligence as the insured
feels that he/she can be compensated for any loss or
damage.
ďˇ Marine insurance companies do not normally make the
compensation promptly on maturity of the policy or for the
financial losses as the expectation of the insured.
ďˇ It may lead to the crimes in the society as the beneficiaries
of the policy may be tempted to commit crimes to receive
the insured amount.
ďˇ Although insurance, including the marine type, encourages
savings, it does not provide the facilities that are provided
by bank.
Notwithstanding the above, marine insurance plays a very
important role in the field of overseas commerce and internal
trade of a country. It is closely linked with banking and
shipping. Banks generally finance the goods which are
transported by ships or by other means of transport in the case of
internal trade and marine insurance protect such goods against
loss or damage. Without such protection the entire trade
structure is bound to suffer.
Briefly discuss various documents required for insurance.
22. What are the various documents required for insurance?
Generally, insurance is of different types, for example marine
insurance, fire insurance, life assurance and so on. However,
there are certain basic documents common to all. Some of these
are discussed hereunder.
Insurance policy
This is a formal contract-document issued by an insurance
company to an insured. It (1) puts an indemnity cover into
effect, (2) serves as a legal evidence of the insurance agreement,
(3) sets out the exact terms on which the indemnity cover has
been provided, and (4) states associated information such as the
(a) specific risks and perils covered, (b) duration of coverage, (c)
amount of premium, (d) mode of premium payment, and (e)
deductibles, if any.
The insurance policy sets out all the terms and conditions of the
contract between the insurer and the insured.
Insurance Declaration
The insurance declaration is one of the insurance documents
under open policy, which is filled in by the insured in printed
form fixed for submission to the insurer. The insurance
declaration particulars are similar with the shipment advice in
content.
Certificate of insurance
23. A certificate of insurance is a document used to provide
information on specific insurance coverage. The certificate
provides verification of the insurance and usually contains
information on types and limits of coverage, insurance company,
policy number, named insured, and the policies' effective
periods. It is a document issued by an insurance company/broker
that is used to verify the existence of insurance coverage under
specific conditions granted to listed individuals. More
specifically, the document lists the effective date of the policy,
the type of insurance coverage purchased, and the types and
dollar amount of applicable liability.
The certificate of insurance is an evidence of the insurance but it
does not set out the details of the terms and conditions of the
insurance. It is also known as Cover Note.
Although the certificate should not be substituted for
information contained in the actual insurance policies, it is
usually a reliable source of information or proof of insurance
coverage.
A certificate of insurance is often demanded in situations where
liability and large losses are a concern. For example, a company
wishes to hire a driver from a temp agency. The company will
most likely ask the agency to show them a certificate of
insurance that proves that certain liabilities will be covered by
insurance in the event the driver causes problems, such as
incurring damages from driving the company's vehicles.
Insurance Broker's Note
24. Insurance broker's note is a broker's notice that an insurance has
been placed pending the production of a policy or certificate.
Since it does not contain any details of the insurance said to be
effected, it is not considered to be an evidence of insurance
contract. Thus a cover note is a temporary document issued by
an insurance company that provides insurance coverage until a
final insurance policy can be issued. A cover note is different
form a certificate of insurance or an insurance policy document.
The note features the name of the insured, the insurer, the
coverage, and what is being covered by the insurance.
Insurance companies issue a cover note in order to provide an
individual with proof of insurance before all the insurance
paperwork has been processed. During this time the insurer may
continue to evaluate the risks associated with insuring the holder
of the cover note, and the cover note will continue to serve as
the insurerâs proof that he or she has purchased coverage until
the insurer issues the policy document and certificate of
insurance. In general, the cover note provides the same level of
coverage as the full insurance policy, though insurers may place
some restrictions while they make any final determinations on
the risks associated with the insurance policy.
How long the cover note lasts depends on how quickly the
insurance company can process the creation of a new policy, and
whether the insurer has any problems with the policy coverage
in between selling the policy and issuing the policy document. If
the cover note expires before the permanent policy
documentation has been received, the individual will either be
25. issued an extension of the cover note automatically or can
request that one be sent.
Insurance companies may allow someone who has recently
purchased an insurance policy but who does not have a formal
policy to cancel the purchase. This allows someone who only
holds a cover note to receive a refund, provided that a claim on
the policy has not been made during the cancelation period.
Some insurance companies do not issue cover notes, and instead
issue a certificate of insurance when the policy is purchased and
accepted.
Beneficiary certificate
This document indicates that the beneficiary of an insurance
policy is someone other than the purchaser of the policy. It may
be required to be included in the document packet in certain
letter of credit payment situations.
Custom bond
A Customs bond is a financial guaranty between 3 parties: the
Insurance/Surety company issuing the Customs bond, the
Principal (who is required to file the bond), and Customs &
Border Protection (CBP). The Customs bond guarantees
Customs & Border Protection that if they cannot collect monies
due from the Principal they can seek remedy, up to the bond
amount, from the Insurance/Surety company. The Customs bond
also indemnifies the Insurance / Surety Company, allowing them
to use any legal means to collect from the Principal any monies
that were paid to CBP on the Principalâs behalf.
26. There are many types of bonds required by Customs & Border
Protection (CBP) for various reasons. The most common types
issued are the import bond, custodian bond, international carrier
bond, foreign trade zone bond and airport security bond. Most
Customs bonds, overall, are Activity Code 1 Import Bonds. The
import bond is required by CBP from all importers in order to
clear entries through Customs. An importer may file a âSingle
Entryâ import bond or a âContinuousâ import bond.
Q3: Explain Country Risks and Interest Rate Risks.
Country risks is said to be a collection of risks associated with
investing in a foreign country. These risks include political risk,
exchange rate risk, economic risk, sovereign risk and transfer
risk, which is the risk of capital being locked up or frozen by
government action. Country risk varies from one country to the
next. Some countries have high enough risk to discourage much
foreign investment. Thus country risk refers to the economic,
political and business risks that are unique to a specific country,
and that might result in unexpected investment losses.
In International Business, one is often operating across different
countries. Socio-political and economic environment in these
different countries is therefore of concern to International
Business. Change in these parameters may put an International
Business to various kinds of risks.
Examples of situations where Country Risk could play an
important role â
27. # Portfolio investment done in another country may suffer loss if
the Share prices tumble because a certain party came to power in
general elections
# A military dictator after coming to power announced that all
foreign nationals should be deported within 24 hours. The
management of MNC had to leave in haste and did not find time
to sell FDI invested in the country take out the funds.
# A country suffered Balance of Payment Crisis as a result of
which the currency depreciated sharply. Profits in that currency
therefore lost value when converted to another currency.
Agencies that are internationally known for their Country Risk
Analysis are â Standard and Poor and Moodyâs. These agencies
review countries regularly on various parameters and rate them
from a business risk perspective.
In some ways, the exercise is similar to a corporate rating
exercise done by agencies like CRISIL, ICRA, Fitch, etc.
Country Risk Rating is (i) time and (ii) purpose specific. The
time dimension would mean that the concerned Country has
been analyzed at a specific point of time and the rating is based
on the situation prevailing at the particular point of time.
Further, different sets of users would look at different aspects of
a country depending on their respective needs. Eg. â
(i) An investor in stock market portfolio of country A
(ii) A manufacturer exporting his products to country A
(iii) An MNC having its production facilities in country A
28. Each of the above users would be interested in knowing
different aspects of a countryâs social, political and economic
performance.
Factors affecting Country Risk may be classified as â
(i) Economic
(ii) Political
(iii) Social
Economic Factors
Certain specific economic parameters are analyzed while
evaluating Country Risks. Here the basic issue is to examine the
(i) ability of a country to honor its external obligations and (ii)
the possible strain it would put on the exchange rate.
It is important to note here that both the above issues would
directly depend on the external sector situation. However,
external sector of any country cannot be examined in isolation.
It is equally important to understand the domestic economy by
means of various GDP, Fiscal Policy and Monetary policy
related parameters.
Again depending upon the time horizon that one is looking at it
is important to focus not only on the immediate values of these
parameters but also on long term trends as also on the long term
sustainability of these trends.
The internal economic situation as reflected by the GDP, Fiscal
and Monetary variable becomes more important if one is
29. considering a long term involvement by way of FDI in the
country.
These can be grouped as â
(a) GDP related parameters
(b) Fiscal sector parameters
(c) Monetary policy parameters
(d) External sector parameters
Political Factors
A change in political situation of a country is likely to change
the business environment. Some of the important political
factors to be looked into would include â
(a) System of government â democratic, authoritarian, etc.
(b) Major political parties and their ideologies
(c) Party in power, it vision, succession plan, etc.
(d) Leading opposition parties and their ideologies and visions
(e) Maturity of political institutions
Social Factors
(a) Culture and history
(b) Values
(c) Educational levels
30. (d) Major fault-lines / dividing lines in the society
(e) Attitudes towards foreigners, change, technology, profits,
etc
Other factors
Apart from the above factors one would also look at conjectural
factors such as
(a) Economic and Financial Institutional Set-up
(b) Law and order situation
(c) Social stability
(d) Performance on Human Development Index
(e) World opinion about the country
(f) Possibilities of war, external and internal aggression, etc.
(g) Vulnerability to natural disasters such as floods,
earthquakes, etc.
Apart from the ratings provided by the rating agencies, some of
the other indices can give important information about the
business environment in a country. These include â
(a) Corruption Perception Index â computed by Transparency
International
(b) Ease of Doing Business Index â computed by World Bank
(c) Human Development Index â computed by UN
31. (d) Global Competitiveness Index â computed by World
Economic Forum
(e) Gini Co-efficient â computed by CIA and UN
Country Risk Analysis can be applied to International Business
in the following dimensions;
(a) Understanding the likely source and nature of risk
associated with doing business in a particular country.
(b) Possibility of predicting the timing of the uncertain event â
whether in short term or long term.
(c) Planning for proper risk mitigation measures in the
business plan.
(d) Budgeting for costs involved in risk insurance and
avoidance.
(e) Adjusting the return expectations depending on the risk
profile.
Now let us come to the meaning of interest rate risk.
Interest rate risk is the risk borne by an interest-bearing asset,
such as a floating rate loan. An increase in interest rate will
result in buyer or seller paying more interest for their floating
rate loan.
Interest rate risk is one of five types of risk that are not specific
to the firm that affect the return on investments in stocks and
bonds. Unlike the other four types, interest rate risk has a
32. significant effect only on bonds. If the required return (the return
the market demands on the investment) is higher or lower than
the bond's coupon rate (the rate on which interest payments are
based), the price of the bond adjusts to provide the market's
required return. As a result, if interest rates change, bond prices
also change and bond investors can unexpectedly gain or lose
money. Reinvestment rate risk (the risk that the investor won't
be able to reinvest the money received from a bond at the same
rate) is another form of interest rate risk.
Interest rate risk is face by companies with floating and fixed
rate debt. It relates to the sensitivity of profit and cash flows to
changes in interest rates. A company will therefore need to
analyze how profits and cash flows are likely to be affected by
forecast changes in interest rates and decide whether to take
action.
Floating interest rates change according to general market
conditions.
From the forgoing, we can see that interest rate risk is the risk
that an investment's value will change due to a change in the
absolute level of interest rates, in the spread between two rates,
in the shape of the yield curve or in any other interest rate
relationship. Such changes usually affect securities inversely and
can be reduced by diversifying (investing in fixed-income
securities with different durations) or hedging (e.g. through an
interest rate swap).
33. Interest rate risk affects the value of bonds more directly than
stocks, and it is a major risk to all bondholders. As interest rates
rise, bond prices fall and vice versa. The rationale is that as
interest rates increase, the opportunity cost of holding a bond
decreases since investors are able to realize greater yields by
switching to other investments that reflect the higher interest
rate. For example, a 5% bond is worth more if interest rates
decrease since the bondholder receives a fixed rate of return
relative to the market, which is offering a lower rate of return as
a result of the decrease in rates.
Enumerate measures to manage Interest Rate Risks.
How then can companies and/or individuals manage interest rate
risk? Follow the discussion below.
Interest rate risk management has become very important, and
assorted instruments have been developed to deal with interest
rate risk. This write up introduces us to ways that both
businesses and consumers manage interest rate risk using
various interest rate derivative instruments.
As with any risk-management assessment, there is always the
option to do nothing, and that is what many people do. However,
in circumstances of unpredictability, sometimes not hedging is
disastrous. Yes, there is a cost to hedging, but what is the cost of
a major move in the wrong direction? Luckily, those who do
want to hedge their investments against interest rate risk have
many products to choose from.
Forwards
A forward contract is the most basic interest rate management
34. product. The idea is simple, and many other products discussed
in this article are based on this idea of an agreement today for an
exchange of something at a specific future date.
ďˇ Forward Rate Agreements (FRAs)
An FRA is based on the idea of a forward contract, where
the determinant of gain or loss is an interest rate. Under this
agreement, one party pays a fixed interest rate and receives
a floating interest rate equal to a reference rate. The actual
payments are calculated based on a notional principal
amount and paid at intervals determined by the parties.
Only a net payment is made - the loser pays the winner, so
to speak. FRAs are always settled in cash.
FRA users are typically borrowers or lenders with a single
future date on which they are exposed to interest rate risk.
A series of FRAs is similar to a swap (discussed below);
however, in a swap all payments are at the same rate. Each
FRA in a series is priced at a different rate, unless the term
structure is flat.
A forward contract can be said to be a customized contract
between two parties to buy or sell an asset at a specified price on
a future date. A forward contract can be used for hedging or
speculation, although its non-standardized nature makes it
particularly apt for hedging. Unlike standard futures contracts, a
forward contract can be customized to any commodity, amount
and delivery date. A forward contract settlement can occur on a
cash or delivery basis. Forward contracts do not trade on a
centralized exchange and are therefore regarded as over-the-
counter (OTC) instruments. While their OTC nature makes it
easier to customize terms, the lack of a centralized clearinghouse
35. also gives rise to a higher degree of default risk. As a result,
forward contracts are not as easily available to the retail investor
as futures contracts
Futures
Futures contracts are one of the most common derivatives used
to hedge risk. A futures contract is as an arrangement between
two parties to buy or sell an asset at a particular time in the
future for a particular price. The main reason that companies or
corporations use future contracts is to offset their risk exposures
and limit themselves from any fluctuations in price. The ultimate
goal of an investor using futures contracts to hedge is to
perfectly offset their risk. In real life, however, this is often
impossible and, therefore, individuals attempt to neutralize risk
as much as possible instead. For example, if a commodity to be
hedged is not available as a futures contract, an investor will buy
a futures contract in something that closely follows the
movements of that commodity.
Swaps
An interest rate swap is a financial derivative that companies use
to exchange interest rate payments with each other.
Swaps are useful when one company wants to receive a payment
with a variable interest rate, while the other wants to limit future
risk by receiving a fixed-rate payment instead.
Each group has their own priorities and requirements, so these
exchanges can work to the Generally, the two parties in an
interest rate swap are trading a fixed-rate and variable-interest
36. rate. For example, one company may have a bond that pays the
London Interbank Offered Rate (LIBOR), while the other party
holds a bond that provides a fixed payment of 5%. If the LIBOR
is expected to stay around 3%, then the contract would likely
explain that the party paying the varying interest rate will pay
LIBOR plus 2%. That way both parties can expect to receive
similar payments. The primary investment is never traded, but
the parties will agree on a base value (perhaps $1 million) to use
to calculate the cash flows that theyâll exchange. advantage of
both parties.
The theory is that one party gets to hedge the risk associated
with their security offering a floating interest rate, while the
other can take advantage of the potential reward while holding a
more conservative asset. Itâs a win-win situation, but itâs also a
zero-sum game. The gain one party receives through the swap
will be equal to the loss of the other party. While youâre
neutralizing your risk, in a way, one of you is going to lose some
money.
Interest rate swaps are traded over the counter, and if your
company decides to exchange interest rates, you and the other
party will need to agree on two main issues:
1. Length of the swap. Establish a start date and a maturity
date for the swap, and know that both parties will be bound
to all of the terms of the agreement until the contract
expires.
2. Terms of the swap. Be clear about the terms under which
youâre exchanging interest rates. Youâll need to carefully
weigh the required frequency of payments (annually,
quarterly, or monthly). Also decide on the structure of the
37. payments: whether youâll use an amortizing plan, bullet
structure, or zero-coupon method.
To illustrate how a swap may work, letâs look further into an
example.
ABC Company and XYZ Company enter into one-year interest
rate swap with a nominal value of $1 million. ABC offers XYZ
a fixed annual rate of 5% in exchange for a rate of LIBOR plus
1%, since both parties believe that LIBOR will be roughly 4%.
At the end of the year, ABC will pay XYZ $50,000 (5% of $1
million). If the LIBOR rate is trading at 4.75%, XYZ then will
have to pay ABC Company $57,500 (5.75% of $1 million,
because of the agreement to pay LIBOR plus 1%).
Therefore, the value of the swap to ABC and XYZ is the
difference between what they receive and spend. Since LIBOR
ended up higher than both companies thought, ABC won out
with a gain of $7,500, while XYZ realizes a loss of $7,500.
Generally, only the net payment will be made. When XYZ pays
$7,500 to ABC, both companies avoid the cost and complexities
of each company paying the full $50,000 and $57,500.
Options
Interest rate management options are option contracts for which
underlying security is a debt obligation. These instruments are
useful in protecting the parties involved in a floating-rate loan,
such as adjustable-rate mortgages (ARMs). A grouping of
interest rate calls is referred to as an interest rate cap; a
combination of interest rate puts is referred to as an interest rate
floor. In general, a cap is like a call and a floor is like a put.
38. ďˇ Swaptions
A swaption, or swap option, is simply an option to enter
into a swap.
ďˇ Embedded options
Many investors encounter interest management derivative
instruments via embedded options. If you have ever bought
a bond with a call provision, you too are in the club. The
issuer of your callable bond is insuring that if interest rates
decline, they can call in your bond and issue new bonds
with a lower coupon.
ďˇ Caps
A cap, also called a ceiling, is a call option on an interest
rate. An example of its application would be a borrower
going long, or paying a premium to buy a cap and receiving
cash payments from the cap seller (the short) when the
reference interest rate exceeds the cap's strike rate. The
payments are designed to offset interest rate increases on a
floating-rate loan.
If the actual interest rate exceeds the strike rate, the seller
pays the difference between the strike and the interest rate
multiplied by the notional principal. This option will "cap,"
or place an upper limit, on the holder's interest expense.
The interest rate cap is actually a series of component
options, or "caplets," for each period the cap agreement
exists. A caplet is designed to provide a hedge against a rise
in the benchmark interest rate, such as the London
Interbank Offered Rate (LIBOR), for a stated period.
ďˇ Floors
Just as a put option is considered the mirror image of a call
39. option, the floor is the mirror image of the cap. The interest
rate floor, like the cap, is actually a series of component
options, except that they are put options and the series
components are referred to as "floorlets." Whoever is long
the floor is paid upon maturity of the floorlets if the
reference rate is below the floor's strike price. A lender uses
this to protect against falling rates on an outstanding
floating-rate loan.
ďˇ Collars
A protective collar can also help manage interest rate risk.
Collaring is accomplished by simultaneously buying a cap
and selling a floor (or vice versa), just like a collar protects
an investor who is long a stock. A zero-cost collar can also
be established to lower the cost of hedging, but this lessens
the potential profit that would be enjoyed by an interest rate
movement in your favor, as you have placed a ceiling on
your potential profit.
These products all provide ways to hedge interest rate risk,
with different products being appropriate for different
scenarios. There is, however, no free lunch. With any of these
alternatives, one gives up something - either money
(premiums paid for options) or opportunity cost (the profit
one would have made without hedging).
Q4: Give a brief overview of International Payment Methods.
To succeed in todayâs global marketplace and win sales against
foreign competitors, exporters must offer their customers
attractive sales terms supported by the appropriate payment
40. methods. Because getting paid in full and on time is the ultimate
goal for each export sale, an appropriate payment method must
be chosen carefully to minimize the payment risk while also
accommodating the needs of the buyer.
For exporters, any sale is a gift until payment is received.
Therefore, exporters want to receive payment as soon as
possible, preferably as soon as an order is placed or before the
goods are sent to the importer. For importers, any payment is a
donation until the goods are received. Therefore, importers want
to receive the goods as soon as possible but to delay payment as
long as possible, preferably until after the goods are resold to
generate enough income to pay the exporter.
The following is an overview of the main payment methods in
international trade;
Cash-in-Advance
With cash-in-advance payment terms, an exporter can avoid
credit risk because payment is received before the ownership of
the goods is transferred. For international sales, wire transfers
and credit cards are the most commonly used cash-in-advance
options available to exporters. With the advancement of the
Internet, escrow services are becoming another cash-in-advance
option for small export transactions. However, requiring
payment in advance is the least attractive option for the buyer,
because it creates unfavorable cash flow. Foreign buyers are also
concerned that the goods may not be sent if payment is made in
advance. Thus, exporters who insist on this payment method as
41. their sole manner of doing business may lose to competitors who
offer more attractive payment terms.
Letters of Credit
Letters of credit (LCs) are one of the most secure instruments
available to international traders. An LC is a commitment by a
bank on behalf of the buyer that payment will be made to the
exporter, provided that the terms and conditions stated in the LC
have been met, as verified through the presentation of all
required documents. The buyer establishes credit and pays his or
her bank to render this service. An LC is useful when reliable
credit information about a foreign buyer is difficult to obtain,
but the exporter is satisfied with the creditworthiness of the
buyerâs foreign bank. An LC also protects the buyer since no
payment obligation arises until the goods have been shipped as
promised.
The elements of a Letter of Credit include;
ďˇ A payment undertaking given by a bank (issuing bank)
ďˇ On behalf of a buyer (applicant)
ďˇ To pay a seller (beneficiary) for a given amount of money
ďˇ On presentation of specified documents representing the
supply of goods
ďˇ Within specified time limits
ďˇ Documents must conform to terms and conditions set out in
the letter of credit
ďˇ Documents to be presented at a specified place
Letter of credit transactions are not without risks. The risks
inherent in these types of transactions include:
42. ďˇ Fraud risk, in which the payment is obtained through the
use of falsified or forged documents for worthless or
nonexistent merchandise.
ďˇ Regulatory risk, in which government action may prevent
completion of the transaction.
ďˇ Legal risk, in which legal action prevents completion of the
transaction.
ďˇ Force majeure risk, in which completion of the transaction
is prevented by an external force such as war or natural
disasters.
ďˇ Failure of the issuing or collecting bank.
ďˇ Insolvency of the buyer or beneficiary.
Documentary Collections
A documentary collection (D/C) is a transaction whereby the
exporter entrusts the collection of the payment for a sale to its
bank (remitting bank), which sends the documents that its buyer
needs to the importerâs bank (collecting bank), with instructions
to release the documents to the buyer for payment. Funds are
received from the importer and remitted to the exporter through
the banks involved in the collection in exchange for those
documents. D/Cs involve using a draft that requires the importer
to pay the face amount either at sight (document against
payment) or on a specified date (document against acceptance).
The collection letter gives instructions that specify the
documents required for the transfer of title to the goods.
Although banks do act as facilitators for their clients, D/Cs offer
no verification process and limited recourse in the event of non-
payment. D/Cs are generally less expensive than Lcs.
Open Account
43. An open account transaction is a sale where the goods are
shipped and delivered before payment is due, which in
international sales is typically in 30, 60 or 90 days. Obviously,
this is one of the most advantageous options to the importer in
terms of cash flow and cost, but it is consequently one of the
highest risk options for an exporter. Because of intense
competition in export markets, foreign buyers often press
exporters for open account terms since the extension of credit by
the seller to the buyer is more common abroad. Therefore,
exporters who are reluctant to extend credit may lose a sale to
their competitors. Exporters can offer competitive open account
terms while substantially mitigating the risk of non-payment by
using one or more of the appropriate trade finance techniques
covered later in this Guide. When offering open account terms,
the exporter can seek extra protection using export credit
insurance.
Consignment
Consignment in international trade is a variation of open account
in which payment is sent to the exporter only after the goods
have been sold by the foreign distributor to the end customer.
An international consignment transaction is based on a
contractual arrangement in which the foreign distributor
receives, manages, and sells the goods for the exporter who
retains title to the goods until they are sold. Clearly, exporting
on consignment is very risky as the exporter is not guaranteed
any payment and its goods are in a foreign country in the hands
of an independent distributor or agent. Consignment helps
exporters become more competitive on the basis of better
availability and faster delivery of goods. Selling on consignment
can also help exporters reduce the direct costs of storing and
44. managing inventory. The key to success in exporting on
consignment is to partner with a reputable and trustworthy
foreign distributor or a third-party logistics provider.
Appropriate insurance should be in place to cover consigned
goods in transit or in possession of a foreign.
Counter Trade / Counter Purchase / Barter Trade
In yet another case of business arrangement called counter trade,
exports may be linked with return purchase of some other items
from the importer or from another source in the country. The
payment may also involve services other than products. This
kind of trade becomes a necessity while dealing with countries
that do not have sufficient foreign currency. There is also
another system of international barter which is not very
commonly practiced in the commercial world.
Draft
A draft, sometimes called a bill of exchange(B/E), is the
instrument normally used in inter-national commerce to effect
payment. A draft is simply an order written by an exporter
(seller) instructing an importer (buyer) or its agent to pay a
specified amount of money at a specified time. Thus, it is the
exporterâs formal demand for payment from the importer.
The person or business initiating the draft is known as the
maker, drawer, or originator. Normally, this is the exporter who
sells and ships the merchandise. The party to whom the draft is
addressed is the drawee. The drawee is asked to honor the draft,
that is, to pay the amount requested according to the stated
terms. In commercial transactions, the drawee is either the
45. buyer, in which case the draft is called a trade draft, or the
buyerâs bank, in which case the draft is called a bank draft. Bank
drafts are usually drawn according to the terms of an L/C. A
draft may be drawn as a bearer instrument, or it may designate a
person to whom payment is to be made. This person, known as
the payee, may be the drawer itself or it may be some other party
such as the drawerâs bank
Escrow
Escrow is a legal arrangement (and most commonly a payment
arrangement) whereby money is delivered to a third party
(called an escrow agent) to be held in trust (âin escrowâ)
pending the fulfillment of condition(s) in a contract, whereupon
the escrow agent will deliver the payment to the proper
recipient. Typically, escrow is used when the Buyer and Seller
are unknown to each other.
In an international trade context, after the Buyer and Seller have
agreed to the transaction, the buyer puts the payment in escrow
by paying the escrow agent, which both parties have agreed to
use. The seller sends the shipment and upon acceptance by the
buyer, the escrow agent releases the payment to the seller.
What do you understand by Bill of Lading and Bill of Exchange?
Bill of lading
Bill of lading is a contract where the ship-owner acknowledges
the receipt of the goods on the board and undertakes to carry the
goods to the destination port as per conditions stated therein. It
contains name of the ship, the place of loading, destination,
name of the importer and full description of goods. These are
46. prepared in five copies where the first three copies are given to
the importer and one copy is retained by the captain and another
copy is handed over to the exporter.
The usual form of a Bill of lading includes the following
information:
1. Name of the shipping company
2. Name of the shipper.
3. Name and address of the importer (consignee).
4. Name and address of the party to be notifies on arrival of the
shipment, usually the importer. This applies only when the bill
of lading has been made out âto order.â
5. Name of the carrying vessel.
6. Names of the ports of loading and discharge.
7. Whether freight is payable and whether it has been paid.
8. Number of originals in the set of the bill of lading documents.
9. Marks and number identifying the goods.
10. Brief description of the goods (possibly including weights
and dimensions).
11. Number of packages.
12. Signature of the shipâs master or his agent.
47. 13. Date on which the goods were received for shipment and / or
loaded on the vessel (This must not be later than the shipment
date indicated in the export order or the letter of credit
document).
14. Signature of the exporter (or his agent) and his designation if
applicable.
In case the consignor wants to take the entire ship on hire for
transportation of the cargo then the transport document issued
by the shipping company is known as charter party. This is
different from bill of lading which is issued when a particular
cargo occupies part of the space on the ship.
To be accepted, a bill of lading has to be clean and not dirty.
This means that the bill has to be free from any adverse remarks
or notations (called 'clauses') made by the shipping company
about the condition, packaging, or quantity of the goods being
shipped. Importers and their banks usually insist on a clean B/L
for payment under a letter of credit.
The features of a bill of lading are:
ďˇ It is an evidence of contract.
ďˇ It serves as a document of title-to-goods.
ďˇ It may be marked freight paid or freight forward.
ďˇ A clean bill states that packing of goods are free from
defects.
ďˇ A foul bill states that the packing is defective.
To ship any goods, a bill of lading is required and acts as a
receipt and a contract. Firstly, it serves as evidence for a
contract of carriage. So bill of lading is a document of evidence
48. under a sea consignment. Means, Bill of Lading is proof of
shipment under a sea mode of transport. Secondly, it is proof of
receipt of shipment by carrier of goods to overseas destination.
Once after completion of necessary export customs formalities
in an exporting country, the cargo is handed over to shipping
company who carries goods to final destination. The carrier or
their agent issues bill of lading as proof of receipt of cargo.
Thirdly, Bill of Lading is a document of title. It is a legal
document used as proof of shipment in various authorities, as it
has been approved as per Negotiable instrument Act. Without
original bill of lading, the goods cannot be taken delivery at
destination.
Bill of exchange
A bill of exchange is defined as âan instrument in writing,
containing an unconditional order, signed by the maker,
directing a certain person, or to the bearer of the instrumentâ.
An Instrument, in order to amount in law to as bill of exchange,
must fulfill the following conditions (i) it must be in writing (ii)
signed by the maker; (iii) it must contain an order iv) which
must been unconditional; v) it must direct a certain person vi) to
pay certain sum of vii) money only viii) to a certain person or
his order or to bearer. Ix) It must be properly stamped. Briefly
speaking, before a document can be called a bill of exchange,
the drawer must be certain, the order must be certain, the drawee
must be certain, the payee must be certain and the sum payable
must also be certain. These are popularly called the âfive
certaintiesâ of a bill of exchange.
49. A bill of exchange usually has certain characteristics, which are
considered below.
(i) It should be noted that a bill of exchange cannot be oral; it
must always take the form of as written document. No particular
words are necessary to be used nor is there a set form in which
alone a bill of exchange can be drawn. Provided the document
fulfills the above conditions laid down by law it will amount to a
bill of exchange, whatever its form may be. Writing includes
printing.
(ii) A bill which is not signed by the drawer is regarded in law as
an âinchoate billâ. The signature of the drawer may not be
affixed to the document at the time it is drawn but till this is
done, the bill is not inchoate and ineffective in law. Thus no
action can be brought by as holder against acceptor on a bill
which is unsigned by the drawer. Signature includes a mark and
even an impressed or litho stamp. The signature on a bill of
exchange need not necessarily be of the drawer himself in order
to make it valid; The signature of an authorized agent on behalf
of the drawer is sufficient for the purpose (see seq.)
(iii) Though no particular form of words is necessary in order to
constitute as valid bill, it is essential that the words used must
amount to an âorderâ. In other words, they must not been
precatory, i.e. amounting to as mere request, which the
addressee is at liberty either to carry out or refuse to carry out.
Thus where the words used were âMr. Little, please to let the
bearer have seven pounds and place it to my account and you
will oblige, your humble servant R. Slack formâ, it was held that
this was not as valid bill. On the other hand , where the words
50. used were âMr. nelson will oblige Mr. Webb by paying to J.
Ruff or order twenty genius only his accountâ, it was held to be
as valid bill.
(iv) It is of the essence of as bill that the order directing payment
should be unconditional, i.e. the payment should not, only the
face of the bill, be dependent on the happening as contingency
or the fulfillment of a condition.
Thus an order directing payment to be made âif as certain ship
arrivesâ, âonly marriageâ (b) or âwhen realizedâ(c) is not as
valid bill of exchange. Similarly, where moneys are directed to
been paid out of as certain fund, e.g. out of amount standing to
oneâs credit or âout of moneys coming from Xâ(d) , it has been
held that the document is not as valid bill, because there may
been no or notice sufficient fund or notice money may been
recovered at all.
A direction to the drawer, however, to reimburse himself out of
as particular fund will not make the bill conditional. Further, as
the expl. to sec. 5 points out, a bill will not been regarded as
conditional, because it makes the payment conditional only the
happening of an event, which in the ordinary course of nature
must happen, though the exact time of its happening may been
uncertain , e.g. âonly the death of Xâ.
(v) The drawee must be certain. If the name of the drawee is not
mentioned, the bill is incomplete, and nobody who accepts the
bill in that condition can be made liable at law as an acceptor. Of
course there is nothing to prevent the holder in such a case from
treating the bill as a promissory note and treating the âacceptorâ
as the maker thereof. Notice that there can be joint drawee of
51. bill but not alternate or successive drawee. Further, if the
draweeâs name is wrongly mentioned, evidence may be lead to
prove who was the person really intended. In an English case,
the name of drawee was omitted but his residential address was
mentioned, and the person concerned accepted the bill. It was
held that he could be validly held liable as an âacceptorâ.
(vi) The sum payable must be certain. As direction to pay
â$65and all sums that may be dueâ does not make as valid bill.
As the expletory sec.5 points out, however, the sum is not
uncertain because it is directed to be paid with interest or by
installments or at the prevailing rate of exchange (as in case of
foreign bill).
(vii) The amount directed to be paid must be expressed in terms
of money only. Thus an order to pay a certain sum and also to
deliver up a horse was held not to be valid bill. Similarly, as
direction to pay money and to hand over as security is not a bill.
(viii) The bill must be drawn and made payable either to a
certain person or his order to bearer. In this connection it has
been recently held in England that a document drawn payable to
âcash or orderâ is not a bill of exchange as it is not made
payable âto or to the order of any specified persons or bearerâ.
The payee must also be certain, i.e. clearly specified only the
face of the bill or being otherwise capable of being ascertained
with certainty. Notice that it is not necessary for the validity of a
bill that the payee must be different from either the drawer or
drawee. A bill drawn by A on B in favor of himself is a valid
bill; similarly, a bill drawn by A only B in favor of B is also
valid. In the last case however, the bill is not effective till the
52. drawee endorse it in favor of another, note further that the Act
specifically lays down that a bill may be made payable to joint
payees or to payees in the alternative.
(ix) Art. 13 of the Stamp Act lays down the proper stamp for
bills of exchange. Generally speaking, notice stamp is
chargeable on a bill payable only demand. As regards other bills,
the duty is 2 annas per thousand or as portion thereof; if bill is
payable not more than one year after date or sight; in all other
cases the same duty as in case of a bond. A bill must be properly
stamped when necessary. In absence of a proper stamp, the bill
may be in admissible in evidence (sec.35, Stamp act). Notice
that under sec.46, the making (acceptance or endorsement) of a
bill of exchange is not completed till delivery thereof , either
actual or constructive.
Over and above the particulars the following points in
connection with as bill of exchange may been noted: Figures:
the bill at the top or bottom corner mentions the amount in
figures. The act provides that where the sum payable is
expressed in words is the amount payable (sec.18). Date: the
date is mentioned in order to compute maturity of bill. That date
is by law regarded as the date of the issue of the bill.
A bill is not invalid because it is undated. Evidence may be
adduced to prove the date of its issue. As bill may been
antedated or post dated. Place of issue is also mentioned. This is
to determine whether it is an âinland âor a âforeignâ bill. âFor
vale receivedâ: the words though generally found in bills of
exchange are really superfluous, consideration being always
presumed in case of negotiable instrument (sec.118) and also
53. because consideration can always been proved by extrinsic
evidence.
As can be seen from the above, there are three entities that may
be involved with a bill of exchange transaction. They are:
ďˇ Drawee. This party pays the amount stated on the bill of
exchange to the payee.
ďˇ Drawer. This party requires the drawee to pay a third party
(or the drawer can be paid by the drawee).
ďˇ Payee. This party is paid the amount specified on the bill of
exchange by the drawee.
A bill of exchange normally includes the following information:
ďˇ Title. The term "bill of exchange" is noted on the face of
the document.
ďˇ Amount. The amount to be paid, expressed both
numerically and written in text.
ďˇ As of. The date on which the amount is to be paid. Can be
stated as a certain number of days after an event, such as a
shipment or receipt of a delivery.
ďˇ Payee. States the name (and possibly the address) of the
party to be paid.
ďˇ Identification number. The bill should contain a unique
identifying number.
ďˇ Signature. The bill is signed by a person authorized to
commit the drawee to pay the designated amount of funds.
Issuers of bills of exchange use their own formats, so there is
some variation from the information just noted, as well as in the
layout of the document.
54. A bill of exchange is transferable, so the drawee may find itself
paying an entirely different party than it initially agreed to pay.
The payee can transfer the bill to another party by endorsing the
back of the document.
A payee may sell a bill of exchange to another party for a
discounted price in order to obtain funds prior to the payment
date specified on the bill. The discount represents the interest
cost associated with being paid early.
A bill of exchange does not usually include a requirement to pay
interest. If interest is to be paid, then the percentage interest rate
is stated on the document. If a bill does not pay interest, then it
is effectively a post-dated check.
If an entity accepts a bill of exchange, its risk is that the drawee
may not pay. This is a particular concern if the drawee is a
person or non-bank business. No matter who the drawee is, the
payee should investigate the creditworthiness of the issuer
before accepting the bill. If the drawee refuses to pay on the due
date of the bill, then the bill is said to be dishonored.
Bills of exchange are important for a number of reasons;
Bill of exchange fixes the date of payment. The creditor knows
when to expect his money and the debtor also knows when he
will be required to make payment.
A bill of exchange is a negotiable instrument and can be used in
settlement of debts.
It is a written and signed acknowledgement of debt and affords
conclusive proof of indebtedness.
55. A debtor is free from worries and enjoys full period of credit, as
he can never be called upon to pay the amount of the bill before
the due to date.
A creditor can convert the bill into cash by getting it discounted
with the bank.
Q5: What is the scope of coverage of Transport Insurance?
Export and import in international trade, requires transportation
of goods over a long distance. No matter whichever transport
has been used in international trade, necessary insurance is must
for ever good.
Cargo insurance also known as marine cargo insurance is a type
of insurance against physical damage or loss of goods during
transportation. Cargo insurance is effective in all the three cases
whether the goods have been transported via sea, land or air.
Insurance policy is not applicable if the goods have been found
to be packaged or transported by any wrong means or methods.
So, it is advisable to use a broker for placing cargo risks.
The following can be covered for the risk of loss or damage:
Cargo import, export cross voyage dispatched by sea, river,
road, rail post, personal courier, and including associated storage
risks.
Good in transit (inland).
Freight service liability.
56. Associated stock.
However there are still a number of general exclusion such loss
by delay, war risk, improper packaging and insolvency of
carrier. Converse for some of these may be negotiated with the
insurance company. The Institute War Clauses may also be
added.
Regular exporters may negotiate open cover. It is an umbrella
marine insurance policy that is activated when eligible
shipments are made. Individual insurance certificates are issued
after the shipment is made. Some letters of Credit Will require
an individual insurance policy to be issued for the shipment,
While others accept an insurance certificate.
Whereas standard marine/transport cover is the answer for
general cargo, some classes of business will have special
requirements. General insurer may have developed specialty
teams to cater for the needs of these businesses, and it is worth
asking if this cover can be extended to export risks.
Cover may be automatically available for the needs of the trade.
Example of this are:
Project Constructional works insurers can cover the movement
of goods for the Project.
Fine art
Precious stones; Special cover can be extended to cover sending
of precious stones.
57. Stock through put cover extended beyond the time goods are in
transit until when they are used at the destination.
Any discussion of transportation insurance coverage would not
be complete without mentioning the INCOTERMS. The
Incoterms rules or International Commercial Terms are a series
of pre-defined commercial terms published by the International
Chamber of Commerce (ICC). They are widely used in
International commercial transport transactions or procurement
processes. An exporter selling on, for example FOB
(INCOTERMS 2000) delivery terms would ,according to the
contract and to INCOTERMS, have not responsibility for
insurance once the goods have passed the ship's rail. However,
for peace of mind, he may wish to purchase extra cover, which
will cover him for loss or will make up cover where the other
policy is too restrictive. This is known as Seller's Interest
Insurance.
Similarly, cover is available to importers/buyers. Seller's Interest
and Buyer's Interest covers usually extended cover to apply if
the title in the goods reverts to the insured party until the goods
are recovered resold or returned.
Importers buying goods for a particular event may be interested
in consequential loss cover in case the goods are late (for a
reason that id insured) and (expensive) replacements have to be
found to replace them. In such cases, the insurer will pay a claim
and may receive proceeds from the eventual sale of the delayed
goods.
58. From the forgoing, we can see that the scope of coverage of
transport insurance has both general and special nature in terms
of application.
How is transport risk managed?
Transport risk management should follow a logical sequence.
The following processes are involved;
Risk assessment; To more effectively assess or measure overall
impact, an approach to evaluating consequences is into effect,
one that takes into consideration a more comprehensive account
of contingent and societal effects. Meaningful impact measures
include:
⌠Fatalities & injuries (acute and long-term)
⌠Cleanup & disposal costs
⌠Property & product damage
⌠Loss due to business interruption
⌠Environmental degradation & ecosystem damage
⌠Traffic & community disruption
⌠Public anxiety
⌠Diminished agency/company value and image
The obvious benefit of a more accurate assessment of
consequence is the ability of transportation risk managers to
make more informed decisions.
59. Prioritizing Transportation Risk; Despite public outcry for a
completely safe world, resource constraints (e.g., people, time,
money) will always exist that preclude such a goal from being
fully achievable. Hence, the risk management process must be
oriented towards the prioritization of risks, prompting those of
greatest concern to become the focus of improved control.Risk
prioritization and follow-through is a process-oriented activity,
involving the following steps:
1)identify critical transportation facilities,
2) perform risk assessments,
3) develop risk management control strategies (prevention &
deterrence; preparedness; response; recovery),
4) implement control strategies and
5) monitor performance
While perhaps simple in concept, successful implementation of
this process within the transportation sector is an ambitious task.
Our nationâs transportation infrastructure is large and diverse,
representing a variety of potential terrorist targets. This
infrastructure, supporting both passenger and freight
transportation, contains:
⌠Highways
⌠Pipelines
⌠Railroads
60. ⌠Navigable waterways
⌠Air transport networks
⌠Fixed facilities (traffic management centers, terminals, transfer
and storage sites, rest areas)
⌠Infrastructure hot spots (e.g., bridges, tunnels)
⌠âVehiclesâ that use these facilities
Whether conducted on a local, state or national scale, it will be
important for the risk prioritization process to be inclusive by
involving all relevant parties in the region of interest.
This will help ensure that all potential transportation
vulnerability points have been identified and evaluated at the
front end of the process, allowing risk management priorities
and control strategies to be determined with the confidence of
knowing that a systematic process was used in making these
decisions.
Emergency Response Planning: With an expanded set of
consequences to consider and the potential for more severe
impact, the preparedness community should re-consider its
approach to emergency response planning. At the outset, it may
be desirable for the region of interest to identify:
1) all the transportation risk managers that might be involved in
an emergency response,
61. 2) the coordination & communication links that presently exist
between respective organizations,
3) how well these links are performing and
4) other communication & coordination links that need to be
established. Based on these findings, a regional response plan
can emerge in which any anticipated transportation risk with
significant potential for harm will have been pre-screened, with
the deployment and management of the response activity
carefully laid out. With this structure in place, preparedness
exercises (e.g., simulated emergencies) can be devised that offer
greater benefit to the region because emphasis can be placed on
more critical concerns and involve the appropriate risk
managers.
Information Management: At the crux of any transportation risk
management activity is the ability to obtain, store, analyze and
share information. Because transportation involves both static
(e.g., location of fixed facility) and dynamic (e.g., location of
rolling stock) operations, a variety of technologies offer the
potential to support risk management information needs. These
include:
⌠Surveillance and detection technologies (e.g., remote sensing,
electronic tags)
⌠Geographic information systems (GIS)
⌠Global positioning systems (GPS)
62. ⌠Communications devices and networks
It is also vital to consider the following when develop any
transport risk management process;
Enabling Tools; To meet these expectations, transportation risk
managers will be asked to handle a variety of responsibilities,
such as being able to:
⌠Plan & track before/during/after a major event
⌠Assess & prioritize locations in need of risk management
attention
⌠Identify at-risk populations & sensitive environments
⌠Communicate risks to affected parties
⌠Locate & deploy response resources
⌠Estimate damage
⌠Identify & evaluate mitigation strategies
⌠Maintain a centralized risk management information system
The availability and use of a variety of enabling tools will be
critical in supporting these needs.
Several of these tools are discussed below:
Knowledge and Awareness Building: An important part of the
transition into a new paradigm is to be able to share the vision
and concept with transportation risk managers in a nurturing
63. environment. This provides the opportunity to introduce new
ideas as well as to invite feedback.
Through channels such as conferences, workshops, training
courses, guidebooks and web sites, knowledge and awareness
building can be provided in a manner consistent with a
transportation risk managerâs ability to absorb information and
adapt to change.
Process Development: A systematic approach to identifying
critical transportation facilities, performing risk assessments,
implementing risk management control strategies and
monitoring performance requires the development of policies
and procedures to guide the process. Activity flow diagrams
should be created that identify all possible transportation
infrastructure that could be subject to natural and man-made
(accidental and intentional) risks. Credible methods and
practices should be established for assessing and prioritizing
these risks as well as evaluating and selecting management
control strategies. Finally, meaningful measures of risk
management performance should be defined along with
appropriate data collection mechanisms. Within each of these
process steps, key stakeholders should be identified and tasks
assigned, so that accountability can be established and
monitored.
Intelligence Gathering: The effectiveness of the transportation
risk management process will be strongly influenced by the
quality of the information used in its execution. Determining
64. threat and vulnerability requires access to information that
enables the transportation risk manager to define the range of
consequence scenarios and assign corresponding likelihood.
Although some of this information may be available either in the
public domain or resident within the organization, liaison with
the intelligence community will likely improve data quality in
terms of information breadth, depth and accuracy.
References;
www.publishyourarticles.net
Risk and Insurance in International Trade, MBA in International
Business, Amity University, India
Harrington, S.E. and G.R. Niehaus,2005. Risk Management and
Insurance
www.investopedia.com/university/risk
Moneycrashers.com
Assignment B
The Case of the Never Ending Scope Creep
In 1999, the XY Department of the Federal Government
reviewed its Year 2000 Date Turnover Computer Risks and
found that its outdated computer systems for managing public
clients needed replacing. A business case was prepared for
funding the replacement while at the same time implementing
65. some improvements. The total budget requested was $2.3
million.
In view of a shortage of funds around at the time, government
did not approve this amount. Only $1.5 million was authorized.
However, the XY Department accepted this amount after they
decided that they could maybe do the work for around the $1.5
m.
Accordingly, a project was scoped and planned, with specific
milestones for implementing the hardware and, subsequently the
software, across 87 sites within its jurisdiction. A final
completion date of 30th June 2001 was projected. The original
business case had loosely identified some risks to the project
that were also included in the project plan. A project steering
committee was established, with the department chief (CEO) as
the sponsor, and representation by influential managers with
differing outcome needs to suit their particular work
environment. The project commenced in July 1999.
In view of the shortfall on its original budget request, the
committee decided not to employ a project manager. Instead it
assigned this responsibility to its Finance Manager, who would
undertake the work along with his normal duties.
A Company, called "Good Programs" was contracted to supply
the software and assist in the implementation. This company
recognized the marketing opportunities of this project, as the XY
Department was its biggest client in the region. As a result,
66. they offered, free of charge, many more features that were not in
the original scope, provided the department allowed them to be,
in essence a research and development (R&D) site. This would
assist Good Programs to more readily sell their products
elsewhere around the world, while providing the XY
Department with additional functionality and benefits.
Initially, the steering committee met regularly, but as new
versions of the resulting software were being implemented
regularly, meetings became less frequent and Good Programs
were left to do more and more of the day to day management of
the new version implementations.
These new versions were developed after consultation with the
various individual managers to accommodate requested new
features with little consultation amongst all of the managers. All
the XY Department and steering committee had to do was to
identify problems with the software and to make the system
testers available for new versions. However, the effect was an
unanticipated overhead for the department.
Sometime after the original project was scoped and commenced,
both the original CEO and finance manager had been moved out
of the department and new officers have been appointed.
At this time, the new CEO has been advised that about $185,000
more is needed for the project, which is not in his current
budget. The original project has not been signed off, indeed, it is
evident that it has not been completed. The new CEO of the
67. department is not sure of the original scope of the project, what
aspects have been implemented, nor what has been spent for
which parts. There do not seem to be any reliable reports
available as to original scope, scope changes, schedule or
budget.
The CEO is concerned that the project has become more of a
career than a project, with version 16.5 of the client management
system now being tested with yet more features. In addition,
there are some past software problems that are still outstanding.
Nevertheless, Good Systems have promised that problems will
be fixed in the next version ... .
You are a senior consultant with PM Right Track (PMRT), a
competent project management consulting company. The CEO
has called you in for advice. The information is brief, but this is
all the information that he and the new finance manager are able
to provide. The CEO's mandate to you is to:
Report and Compare your assessment of the current project
status.
The under budgeted nature of this project was fundamental to
the eventual problems encountered by the project.
The lack of regular meetings by the Steering Committee was not
proper.
68. What was also not proper was to allow the consultant firm,
Goods Program, to serve its interest through the project.
This project also drifted from its original strategic scope and
intent.
The formation of a project steering committee and the
representation of influential managers as part of the committee
for safe guarding areasâ interest is could also be a source of
conflict about project execution.
The project lacked independent project manager, rather the
finance manager of the parent company doubled as the project
manager. These dual functions could lead to lack of proper
monitoring of the project progress.
The project also was not audited on a regular basis to ascertain
proper spending of money.
The removable of the original CEO and finance manager
without preparing a comprehensive report about the status of the
project before the new personnel took over was not proper for
the progress of the project because it caused the incompletion of
the project on time.
Recommend improvements to the XY Department's future
project management practices.
Our recommendations will be based on the findings mentioned
above;
69. Under budgeted projected should never be allowed to take off
An independent project manager would be needed for future
projects
Any steering committee of any future project should also be
independent from the parent company.
Personnel of the parent company who have institutional memory
of a project should be allowed to continue to help successful
project implementation, or at least such personnel must do
proper handing over.
Any project consultants should not be allowed to serve their
organizationâs interest through future projects.
If a very similar project had to be done again, what attributes
and/or skill sets would you recommend in selecting a project
manager?
The skills that a good project manager possesses are many and
varied,covering the entire spectrum of the human personality.
We can divide these skills into a number of specific categories,
namely:
Personal Skills
Project Managers must be able to motivate and sustain people.
Project team members will look to the project manager to solve
problems and help with removing obstacles. Project managers
70. must be able to address and solve problems within the team, as
well as those that occur outside the team. There are numerous
ways, both subtle and direct, in which project managers can help
team members.Some examples include the following:
â Manage by example (MBE). Team members will be closely
watching all actions of the project manager. Therefore, project
managers must be honest, direct, straightforward, and
knowledgeable in all dealings with people and with the project.
A good manager knows how to work hard and have fun, and this
approach becomes contagious.
â A positive attitude. Project managers must always have a
positive attitude, even when there are substantial difficulties,
problems, or project obstacles. Negative attitudes erode
confidence, and a downward spiral will follow.
â Define expectations. Managers who manage must clearly
define what is expected of team members. It is important to do
this in writingâget agreement from the individual team
members. This leaves no room for problems later, when
someone states âItâs not my job.âPerformance expectations must
be defined at the start of the project.
â Be considerate. Project management is a demanding job with
a need for multiple skills at many levels. Above all, be
considerate and respectful, and give people and team members
the time and consideration they deserve. Make people aware that
their efforts are appreciated and the work that they do is
71. important, because it is. A letter, personal word, or e-mail of
appreciation goes a long way.
â Be direct. Project managers are respected if they are direct,
open, and deal with all types of problems. Never conceal
problems or avoid addressing them. If a problem is bigger than
the project manager or the team can deal with, escalate it to
senior management. Never make commitments that cannot be
delivered.
â Finally, a favorite and personal rule: âUnder promise, then
over-deliver.â
Technical skills
As with all employees, project managers should have the
technical knowledge and skills needed to do their jobs. If
managers lack these skills, training is one option; being
mentored or coached by a more experienced individual is
another.
Management Skills
Project managers need other key skills besides those that are
purely technical to lead and deliver on their projects
successfully.
Coping Skills
72. A good project manager has to acquire a number of skills to
cope with different situations, conflicts, uncertainty, and doubt.
This means:
â Being flexible
â Being persistent and firm when necessary
â Being creative, even when the project does not call for it
â Absorbing large volumes of data from multiple sources
â Being patient but able to differentiate between patience and
action
â Being able to handle large amounts of continuous, often
unrelenting stress
Additionally, good project managers have high tolerance for
surprises, uncertainty, and ambiguity. Projects rarely progress
the way that they are defined, and managers need to manage the
uncertainty that comes with that. A good project manager needs
to understand many facets of the business aspect of running a
project, so critical skills touch on expertise in the areas of
organization, communication, finance, and human resources.
73. Assignment C
Choose the right option:
1. Suppose the project has many hazards that could easily injure
one or more persons and there is no method of avoiding the
potential for damages. The project manager should consider
__________ as a means of deflecting the risk.
a) abandoning the project
b)buying insurance for personal bodily injury
c) establishing a contingency fund
d) establishing a management reserve
e) not acknowledging the potential for injury
2. Risk Management includes all of the following processes
except:
a) Risk Monitoring and Control
b) Risk Identification
c) Risk Avoidance
d) Risk Response Planning
e) Risk Management Planning
74. 3. When should a risk be avoided?
a) When the risk event has a low probability of occurrence and
low impact
b) When the risk event is unacceptable -- generally one with
a very high probability of occurrence and high impact
c) When it can be transferred by purchasing insurance
d) A risk event can never be avoided
4. All of the following are financial risks which may be faced by
business organizations EXCEPT
a) interest rate risk.
b) commodity price risk.
c) product liability risk.
d) currency exchange rate risk.
5. Which of the following is not an example of personal risk?
a) Earning risk
b) Medical expenses
75. c) Longevity risk
d)Worker Injury
6. _____________ risk refers to uncertainty over total of cash
flows due to possible changes in output and input prices.
a) Personal
b) Pure
c) Price
d) Credit
7. Which of the following is not an object of risk management?
a) Identify all potential risks.
b) Identify high-impact/high priority risks.
c) Document risk identification and analysis process.
d)Assume risk
8.All of the following are disadvantages of using insurance
EXCEPT
a) There is an opportunity cost because premiums must be paid
in advance.
b) Considerable time and effort must be spent selecting and
negotiating coverages.
76. c) It results in considerable fluctuations in earnings after a
loss occurs.
d) Attitudes toward loss control may become lax.
9. Which of the following types of loss exposures are best met
by the use of avoidance?
a) low-frequency, low-severity
b) low-frequency, high-severity
c) high-frequency, low-severity
d)high-frequency, high-severity
10. What is the methods of handling risk ďź
a) avoidance
b) loss control
c) retention
d) noninsurance transfers
e) insurance
11. Which of the following is not part of risk management
process?
a) identify and evaluate frequency and severity of losses
b)choosing and implementing risk management methods
c) Shelving a business plan due to high risk
d) monitoring the performance and suitability of the methods.
77. 12. Risk avoidance means:
a) Measures are taken to eliminate loss exposure
b) Measures are taken to reduce loss severity
c) Insurance has been purchased and risk transferred to an
insurance company
d) Is not a useful risk management tool.
13. Business firms face liability lawsuits when their :
a) Products injure consumers
b) Customers steal their inventory
c) Unions go on strike
d) Attorney fails to file legal document
14. The principle of indemnity provides that
a) Insurance premium rates must be neither too high nor too
low
b)The insured should be paid for the loss he or she
suffered and no more no less
c) The insured shall be paid exactly the face amount of the
policy
d) People who cause accidents should pay for the loss that
results
e) Only indemnity companies may issue contracts of