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Trade Risk, Citibank
- 2. Risk Management Identify risk Commercial risk Foreign exchange risk Country risk Other considerations Determining exposure tolerance Understand options available to mitigate risk 2
- 3. Commercial Risk HIGH LOW OPEN RISK OF NON DELIVERY ACCOUNT RISK OF NON PAYMENT DOCUMENTARY COLLECTION LETTER OF CREDIT CASH IN ADVANCE EXPORTER IMPORTER RISK RISK 3
- 4. Foreign Exchange Risk Transaction Translation Economic 4
- 5. Country Risk Political/Sovereign Convertibility Transfer 5
- 6. Other Considerations Regulatory Cultural 6
- 7. Exposure Tolerance Identify Clearly define internal risk tolerances Implement Devise formal risk management policy Adjust Revisit on annual basis 7
- 8. Risk Mitigation Tools Commercial Risks Letter of Credit Letter of Credit Confirmation Documentary Collection FX Risk Hedging: forwards, options Political (Sovereign Risk) EXIM Insurance Credit Risk EXIM Working Capital Guarantee Program EXIM Medium-term Insurance EXIM MTDA 8
- 9. Citi’s Trade Network Central & Eastern Europe Czech Republic - Hungary - Kazakhstan - Poland North America - Romania - Canada - Russia - Mexico - Slovakia - United States - Turkey Asia Pacific - Ukraine - Australia - Brunei - China - Guam Dublin, - Hong Kong Ireland - Indonesia Calgary, Canada Montreal, Canada - Japan - Korea San Francisco, USA Toronto, Canada - Malaysia - New Zealand Glendale, USA Tampa, USA - Philippines Mumbai, - Singapore India - Taiwan Penang, - Thailand Malaysia - Vietnam Indian Sub-continent - Bangladesh Processing Centers / Presentation Windows - India Office Locations - Pakistan - Sri Lanka 7
Editor's Notes
- When doing business overseas, a company does not always have recourse to reliable credit information about prospective trading partners. The exporter’s risk is of non-payment after shipment of the goods. The importer’s risk is of non-delivery of goods. The different payment methods allow for different levels of protection for both importer and exporter. Open account: Simplest and least costly, but offering the least protection to the exporter. Documentary Collection: More complex and more costly, but offering a greater level of protection to both parties. Letter of Credit (L/C): The most complex and the most expensive method but offering a very secure method for international exporters. Cash in Advance: The least protection for the importer but the greatest level of protection for the exporter. Agreement needs to be reached on currency to be used. Sometimes a third currency is mutually acceptable.
- These are the same risks as faced in global cash. Transaction Exposure The income statement exposure to a change in foreign exchange rates between the time a transaction is booked and the time it is settled. Companies buying and selling in foreign currencies will have transaction exposure. Translation Exposure The balance sheet exposure that results from changes in the value of a company’s foreign-based assets and liabilities due to movements in exchange rates. Exposure is created when a foreign subsidiary’s financial statements are converted (translated) into the parent company’s base currency for consolidation. Companies with foreign subsidiaries or foreign operations will have translation exposure. Economic Exposure The impact of fluctuating exchange rates on the value of future cash flows from long-term contracts. Multinational companies with long term future contracts will have economic exposure. Even companies doing business in domestic environment only will have economic exposure if there is an element of foreign competition.
- COUNTRY RISK The possibility that the counterparty's country may experience political or economic instability that makes it impossible to get money or physical assets out of that country. Political Risk: Also known as Sovereign Risk. The possibility that the actions of a sovereign government , through nationalization or expropriation, or independent events such as wars, riots, civil disturbances, may affect the ability of customers in that country to meet their obligations. Convertibility Risk: Risk which exists in any transaction in which legal or regulatory barriers prevent the owner from converting its local currency into the foreign currency required for payment when the obligation is due. The possibility that a local currency will not be convertible to the currency needed to make payment to the exporter. Transfer Risk: Possibility that a borrower is unable, due to legal or other barriers, to transfer funds in the foreign currency of payment to the place of payment when it is due. INSURANCE
- Regulatory: Also LEGAL. Managing the burden of domestic regulatory and legal environment can be a combersome exercise in itself. However the situation becomes more complex on an international level. Firms need to develop a clear uderstanding of the legal risks they will be exposed to. This could include existing regulations that applies to your firms goods and services or any potential changes in regulation that could adversly affect operations. As an example SB international. Cultural: Often is the case that companies can misjudge the importance of cross-cultural differences when expanding their businesses reach overseas. Often this focuses on issues of social and business etiquette, such as Greetings : To shake hands or bow Non verbal communication and Gestures : send different signals ie eye contact Time orientation : The tomorrow approach, everything can wait until tomorrow. Banamex example. All these things while simple on the surface can have a profound affect on how a firm conducts its business. Your firm will need to adapt and possibly adopt a new management philossphy to fit their situation.