Wednesday, May 29, 2019

Risk associated with International Transaction.

All business transactions are accompanied by one or the other risk. However, these risks get enlarged when dealing with parties located internationally. In addition to the commercial risk present in a domestic transaction are foreign exchange risks as well as the country risk, arising due to the political and economic policies of the country.

COUNTRY RISKS

Political Stability:
Political Instability resulting from internal or external conflict can jeopardize any imports/exports transactions of the companies involved in trade activities with such countries. It may result in delayed payments at best to outright default at worst.

Economic Environment:
Adverse economic conditions in the country may get reflected in the poor paying capacity of the companies operating there (also, unstable currency).
Legal Infrastructure:
In the case of Trade Disputes, a solid legal framework assures a company of a quick and just solution.
Foreign Exchange Restrictions:
Forex restrictions in an importer’s country can limit an importer’s ability to make payments for its international purchases.

FOREIGN EXCHANGE RISKS

Foreign Currency Volatility:
A volatile foreign currency may result in uncertainty in terms of the value of future payments in that currency.

COMMERCIAL RISKS

Reliability of Information:
The very fact that International Trade partners are separated by large geographical, cultural and political distances, implies that they tend to have limited information on each other’s financial standings and business track records. As a result, the mutual level of confidence and trust in each other is low.

Trade Dispute:
Dispute resolution mechanisms in each country are different and international trade disputes are more complicated to resolve that domestic trade disputes. Hence, in case of a default, unilateral termination of contract or any other trade dispute, the legal proceedings may turn out to be very expensive and long drawn.

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