Question

Different type of risks between national and international corporation.

Answer 1

Different type of risks between national and international corporation are stated below

Foreign exchange risk

Foreign exchange risk usually concerns accounts receivable and payable for contracts that are or soon will be in force. Foreign exchange rates are constantly in flux, so businesses can be forced to convert funds generated abroad at lower rates than they budgeted. That is why it is imperative that businesses have a foreign exchange policy in place to:

• stabilize profit margins on sales
• mitigate the negative impact of exchange rate fluctuations on procurement and sales
• enhance cash flow control
• simplify foreign and domestic pricing

In order to formulate an adequate foreign exchange policy, businesses must assess their foreign exchange risks, identify the tools available to hedge these risks and carry out a regular comparative analysis to select the most effective tools.

Here are the main types of foreign exchange policies:

• Natural hedging: With this type of hedging, the business generates the majority of its revenues and expenses in the same foreign currency but does not hedge the difference between payables and receivables.
• Selective hedging: This type of hedging covers some foreign exchange transactions when it is difficult to predict needs.
• Systematic hedging: This type of hedging covers all foreign exchange transactions to eliminate the impact of foreign exchange fluctuations on profit margin

Credit risk

Credit or counterparty risk is the risk of not collecting an account receivable. There are ways businesses expanding to global markets can protect themselves against this risk.

• Payment in full at the time of order or open account payment: The business wants to receive 100% of the amount owed at the time of the order, before services are rendered. Such an approach can be used to finance operations, cut finance charges and administrative expenses and eliminate the risk of non-payment. It may be difficult for new exporters and businesses with little negotiating leverage to use this method.
• Letter of credit: A letter of credit is a contingent payment commitment issued by a financial institution whereby the institution agrees to pay a set amount to the product or service provider in exchange for the delivery within a set timeframe of documents proving that the goods were shipped or the service was rendered. A letter of credit protects both the buyer and the seller. It includes the terms of sale and a detailed description of the shipment. The funds are set aside and cannot be used by the buyer as long as the letter is in force.
• Standby letter of credit: A standby letter of credit is used to guarantee creditworthiness. It is not intended to be cashed but rather to guarantee payment under a contract.
• Credit insurance: Credit insurance protects the business's export accounts receivable in exchange for a premium. It is widely used to indirectly finance the buyer by giving the business more flexible payment terms.
• Factoring: Factoring is a common transaction wherein some accounts receivable are sold to a third party to transfer some of the risk and to finance operations. For the customer, it's a short-term financing product that can be used to finance foreign or local sales by selling receivables in exchange for immediate cash without having to wait for payments. Factoring is also a solution to certain liquidity problems that often arise as sales grow.

Intellectual property risk

Intellectual property risk is the risk that third parties may make unauthorized use of the business's strategic information (studies, research, agreements and contracts, client list, trade secrets, etc.) or property that directly or indirectly affects the value of the business's products or services (patents, designs, trademarks, know-how, etc.). When doing business internationally, these risks increase tenfold because of the difficulty of remotely defending the business's rights to this property.

Businesses should register their corporate names and trademarks before signing any agreement, such as a distribution contract, in any country. That said, it is costly and complicated to register and attempt to defend a patent in some areas of the world where intellectual property rights are unlikely to be respected. In these places, it is better for a business to constantly modify or improve its offer to remain competitive, stay one step ahead of the competition and limit the effect of infringement and counterfeiting.

Shipping risks

Whether shipping goods locally or abroad, you face risks such as breakage, loss, theft, vandalism, accident, seizure and contamination. Before you ship any goods, transfer responsibility for shipping to the buyer or seller and take out sufficient insurance. The International Chamber of Commerce's Incoterms set out each party's roles and responsibilities with regard to shipping risk. It is best to work with a forwarding agent.

Ethics risks

Maintaining high ethical standards and being a good citizen can be a challenge in any market. Operating in global markets can lead some businesses to question their values. They must be especially vigilant because customs and social conditions vary from country to country. Make sure that your foreign partners and suppliers adhere to your ethics rules and values wherever they operate.

Desjardins can help you do business internationally, maintain good relations with your foreign customers and suppliers and manage your business risks. Contact Desjardins International Services