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Export Risk Management
International Trade Finance and Exports
Lecture 10
Managing and minimizing export related financial risks in
transportation, collection, and foreign currency.
This lecture and its associated materials have been produced by Mr. Kelvin Ng (MBA, Cambridge) of iAcademy for the
purposes of lecturing on the above described subject and the material should be viewed in this context. The work does
not constitute professional advice and no warranties are made regarding the information presented. The Author and
iAcademy do not accept any liability for the consequences of any action taken as a result of the work or any
recommendations made or inferred. Permission to use any of these materials must be first granted by iAcademy.
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What do Customs do with seized
goods?
• Customs will seize goods trying to enter into a
country illegally.
• These goods will often be confiscated and
auctioned off to the public with the proceeds
going to the government. Play Video.
– NewsLife_ Customs set to auction luxury vehicles on
February 14 __ Feb. 6, 2014
• Not all illegal goods can be sold! Play Video.
– Thai Customs Seize Hundreds of Smuggled Lizards
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Review: Week 9 Lecture
• What are the purpose and roles of customs
controls and procedures at the points of
departure (export), transit and destination
(import)?
• Explain inward processing relief and outward
processing relief. How can an exporter apply
these 2 concepts?
• Explain what transshipment is.
• Name any 3 import controls.
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Review: Week 9 Lecture
• Explain what duties and taxes are and their
differences.
• What information is required in order for
customs to correctly determine the type of tariff
and tariff rate to apply for imported goods?
• What is the Harmonized Commodity Description
and Coding System (HS)? Why is it important?
• Why is it important for customs to know the
country of origin of imported goods?
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Export Risks
• An exporter faces many risks in conducting
business internationally
– 1) Physical Risks
– 2) Credit Risks
– 3) Exchange Risks
A truck in Germany
takes a sharp right
turn and drops 10,000
bottles of Vodka.
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1) Physical Risks
• Goods face physical loss or damage when they
are being moved internationally.
• Typical breakdown of the causes of physical loss:
– Poor handling and stowage – 44%
– Physical damage due to in adequate packing – 33%
– Theft and Pilferage – 22%
– Others E.g. Piracy – 1%
• Example of physical risks. Play Video.
– Ship loses more than 500 containers in heavy seas
– Russian Cargo Ship Loses 1500 Tonnes Of Timber In
Storm
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1) Physical Risks
• Of course… there are always pirates… Play Video.
– Nigeria_ Pirates hijack ship with Indians aboard
Source: http://www.bbc.com/news/world-africa-11704306
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1) Physical Risks
• Physical risks increase with
– Length and time of journey
– Handling (Loading / Unloading /
Transfer) of goods
– Variety of weather conditions
encountered
– Number and variety of
transportation modes used
An exporter can arrange insurance cover for such
physical risks.
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2) Credit Risks
• Even though goods may arrive complete,
undamaged, and on time, there are risks that
the exporter may not be paid.
• Example of scenarios in which the exporter may
not be paid.
– Importer does not accept the quality of the goods
– Importer takes over the goods but delays payment
– Importer may have the intention to cheat
An exporter can arrange insurance cover for such
credit risks.
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3) Exchange Risks (“Currency Risks”)
• A UK exporter will usually prefer to be paid in
GBP, just as a US exporter will usually prefer to
be paid in USD.
• However, this is not always possible. Importers
may pay exporters in a different currency.
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3) Exchange Risks (“Currency Risks”)
• Example of Exchange Risk:
– A UK exporter agrees to sell goods worth SGD
10,000 (GBP 5,000) to a Singapore importer. The
Exchange Rate then: 1 GBP = 2 SGD.
– The goods are delivered 3 months later and the
Singapore importer pays the UK exporter. The
Exchange Rate then: 1 GBP = 2.2 SGD. SGD 10,000
(GBP 4,545)
– The UK exporter receives less GBP than expected
when the sale was made.
An exporter cannot arrange insurance cover for
exchange risks. But there are other tools…
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Cargo (Marine) Insurance
• Cargo (Marine) insurance is oldest form of cargo
insurance.
• Cargo insurance allows many people to share
the risks of goods being lost, damaged, or
delayed during a sea voyage. E.g.
– Goods are jettisoned (thrown overboard) to save
the ship.
– Goods are damaged by fire or by water used to put
out fires.
– The ship is diverted to another port for emergencies
such as repairs or supplies.
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Cargo (Marine) Insurance
• Cargo insurance and sharing the risks of a sea
voyage encourages international trade.
• Few people can bear all the risks and costs if an
entire ship’s cargo is lost.
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Cargo (Marine) Insurance
• In cargo insurance, a key principle applied is the
“General Average”, where all the parties
involved from the ship to the cargo owners
contribute to the loss.
– Where some cargo needs to be sacrificed to save
the ship and its remaining cargo, everyone will bear
the loss together.
If there is loss to some cargo on a ship, an
exporter would need to contribute to the loss
even if his or her cargo was not affected.
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Cargo Insurance
• Today cargo insurance is used to cover sea, air,
road, rail, and their various combinations.
• An exporter can choose whether to insure the
cargo or not… BUT
– Certain Incoterms e.g. CIF, CIP, require the exporter
to arrange cargo insurance and prove it with the
necessary documentation.
– In the event of cargo loss where the ship is at fault,
exporters can take action against the ship owner.
This is difficult.
In practice, cargo insurance is usually arranged.
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Cargo Insurance
• An exporter can approach an insurance
company and insure a specific consignment
(shipment) of goods for a specific journey. E.g.
UK to US.
• The insurance usually takes the form of a
Marine All Risks (MAR) policy, which provides
evidence of an insurance contract.
• Despite the name, a MAR policy also covers
transportation by air, road, and rail, and even
when the cargo is in storage (for a limited time
e.g. 60 days) during transit.
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Cargo Insurance
• In the beginning, different cargo insurers
offered different terms and conditions in their
policies making it difficult for exporters to
compare policies.
• A common set of standard cargo insurance
terms known as Institute Cargo Clauses (ICC)
were adopted by many international marine
insurance organizations.
• A MAR policy has 4 ICC options.
– A, B, C, AIR
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Cargo Insurance
• ICC Clause A
– The most comprehensive (and expensive) cargo
insurance cover.
– Covers all risks of loss or damage from the time the
goods leave the warehouse to the port of
destination.
– Excludes loss due to delay or damage due to
insufficient or inadequate packing by the exporter,
war, strikes, or where the ship is not fit for sailing.
Please hand out and ask students to refer to the
document ICCA010182.pdf
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Cargo Insurance
• ICC Clause B
– Cover less than A
• ICC Clause C
– Cover less than B
• ICC Clause Air
– Covers Air cargo transportation according to ICC
Clause A
• More on Marine Insurance by a leading insurer.
Play Video.
– Zurich Supply Chain Risk Insights_ Marine Insurance
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Cargo Insurance
• In practice, exporters can find it difficult to
insure every single trip and cargo consignment.
• Most large exporters that make regular
shipments of goods often opt for an insurance
policy that covers all of their shipments over a
period of time (e.g. 1 year).
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Credit Insurance
• Depending on the terms of sale agreed, an
exporter may only get paid after the goods have
been shipped, checked and accepted by the
importer. This could take a long time, months,
with slower transportation modes.
• Even when the goods have been delivered in
good condition successfully, the importer may
choose to delay or avoid payment for the goods.
• Delays or non-payments will quickly consume an
exporter’s financial resources and cripple the
exporter’s business.
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Credit Insurance
• Credit risk situations that exporters face include:
– Importer refuses to accept goods
– Importer refuses to make full payment for goods
– Importer delays payment for goods
– Importer goes bankrupt and becomes unable to
make payment for goods
– Payments by importer are dishonored e.g. a bounced
cheque
– Importer is unable to make payment in the agreed
currency and switches to another currency that
causes exchange loss to the exporter
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Credit Insurance
• 2 common solutions to credit risk for exporters:
– 1) Payment in advance
• An exporter may demand full or part payment for the
goods before they are shipped.
• Many importers may not agree or will choose to do
business with other exporters that can extend them
better credit.
– 2) Purchase Credit Insurance
• Play Video.
– Atradius Credit Insurance Explained
– Understanding Credit Insurance with Euler Hermes
(SubtitledENG)
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Credit Insurance
• Credit insurance can be arranged with private
insurance companies and banks such as Lloyd’s
Underwriters and Euler Hermes as well as
country Export Credit Agencies (ECAs).
• ECAs may be private or government sponsored
institutions that provide export financing and
credit insurance to encourage international
trade and develop local industries.
• Example of ECAs:
– EXIM (Export Import) Bank USA, Thailand, Korea…
etc.
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Credit Insurance
• Exporters are advised to get in touch and work
with their country’s ECAs or local chamber of
commerce for international trade for export
related financial support.
• Watch the following video listing the financial
services offered by the UKTI and how it can
offer credit insurance assistance to small
exporters. Play Video.
– UKTI - The role of UK Export Finance in supporting
UK exporters
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Cargo & Credit Insurance Principles
• Insurance will work only when things go wrong
outside of the exporter’s control.
• 1) Insurance will not cover loss when the
exporter is at fault.
– There may be cases where it is not clear whether
the exporter or importer is at fault in any loss.
– Insurance companies will not accepts claims until all
contractual disputes between exporter and
importer are settled.
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Cargo & Credit Insurance Principles
• Insurance will work only when things go wrong
outside of the exporter’s control.
• 2) Insurance may not cover losses when the
exporter does not take actions to minimize the
loss.
– When there is any loss, the exporter must take all
reasonable steps to minimize the loss.
– Example: All claims should be made as soon as
possible (within 3 working days).
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Cargo & Credit Insurance Principles
• Key points on insurance:
• 1) An insurance policy is not a safety net for the
exporter to act recklessly.
• 2) Exporters must keep all documentation and
ensure that they can prove that they have
fulfilled all their obligations.
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Maintain multicurrency accounts
• A multicurrency account is a single bank account
that allows you to hold 2 or more currencies.
– Example: An account that has a USD and GBP
balances. The USD and GBP amounts in the account
earn different interest rates as set by the bank.
– When you deposit USD, your USD balance in the
account increases, the GBP balance remains the
same, and vice versa.
– When you withdraw money from the account you
need to specify which currency you are withdrawing.
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Maintain multicurrency accounts
• An exporter may choose what currency he/she
wishes to be paid in.
• An exporter may take advantage of weaknesses
or strengths in exchange rates to convert 1
currency into another within the account.
• Multicurrency accounts work best for exporters
when they buy and sell in the various currencies
that their account has.
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Purchase forward exchange contracts
• Forward contracts are financial agreements to
buy or sell an agreed amount of foreign
currency at a future date at an agreed exchange
rate.
• Banks will typically quote forward contracts
typically for 3, 6, or 12 months.
• Forward contracts allow an exporter to know in
advance what exchange rate will be used when
payment in foreign currency from the importer
is received, reducing uncertainty.
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Purchase forward exchange contracts
• Example:
– A UK exporter agrees to sell goods worth SGD
10,000 (GBP 5,000) to a Singapore importer. The
Exchange Rate then: 1 GBP = 2 SGD.
– The UK exporter thinks that GBP will appreciate
against SGD in the next 3 months.
– The UK exporter buys a forward exchange contract
to exchange SGD 10,000 for GBP in 3 months at the
rate of 1GBP = 2.1 SGD for GBP 50.
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Purchase forward exchange contracts
• Example:
– 3 months later, the Singapore importer pays the UK
exporter. The Exchange Rate then: 1 GBP = 2.2 SGD.
SGD 10,000 (GBP 4,545).
– Without the forward exchange contract, the
exporter will obtain GBP 4,545.
– Using the forward exchange contract, the exporter
will obtain GBP 4,762.
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Purchase forward exchange contracts
The purpose of the forward exchange contract for
the exporter is to reduce exchange rate
uncertainties.
The exporter may “gain or lose” based on the
difference between the actual exchange rate on
the due day of the contract and the market spot
rate.
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Purchase forward exchange contracts
• Note: If payment from the importer is delayed
and occurs after the due date of the forward
contract, the exporter must buy the foreign
currency in the market to meet the obligations
of the forward contract.
• If the exporter is not sure when payment in the
foreign currency will be received, a forward
option would often be negotiated with the bank
instead.
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Purchase forward exchange contracts
• Review: Forward contracts are financial
agreements to buy or sell an agreed amount of
foreign currency at a future date at an agreed
exchange rate.
• Forward options are financial agreements to
buy or sell an agreed amount of foreign
currency at any time before a future date at an
agreed exchange rate.
• Banks would typically charge more for forward
options because of the flexibility it allows.
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Summary: Week 10 Lecture
• Risks and their various characteristics in the
transportation of cargo.
– Physical, Credit, Exchange.
• Cargo insurance to manage physical risk.
• Credit insurance to manage credit risk.
• Multicurrency accounts and forward contracts
to manage exchange risk.
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What to Expect: Week 10 Activity
• Students will learn about the specific export
procedures and documentation of your country.
(Part 2)
• Assessment 1: Checkpoint 6
– Chapter 3
