Currency risk can arise due to variations in exchange rate.
- Currencies fluctuate regularly and there may be a delay between the time of entering into a contract and the making of the foreign payment to the supplier.
- The local currency amount payable on settlement may be higher than the amount calculated when entering the contract, due to an adverse movement in the market price of the currency
- Movements in exchange rates may significantly affect the profit margin you expect to retain on your international trade transaction
How can currency risk be mitigated?
- Importers can discuss their needs with a Treasury Specialist who will help to identify and manage this risk with a range of currency risk management solutions
- Seek independent financial advice in respect to risks associated with foreign currency transactions and the financial products available to help minimise that risk
|Non-performance / non-delivery risk|
When dealing with a supplier there is always a risk of non-performance, this may be heightened when dealing with an overseas supplier.
- Your supplier may not perform according to the sales contract, either by delivering the wrong or inferior goods or not delivering at all or not at the agreed time.
- Your supplier may not be willing or able to perform as contracted; these events may be the result of things outside the control of the supplier, like industrial action, shipping availability or in extreme cases, acts of war or other violence.
- Non-performance, whatever the cause, may adversely affect your business; you may lose customers or sales as a result
How can non-performance/non-delivery risk be mitigated?
Whilst there are no guaranteed ways to eliminate these risks, they can be managed by:
- Seeking trade references before entering into a contract with a new trading partner, investigate their reputation and the product
- Request appropriate shipping documentation to be presented before making payment
- If you have an agent in the supplier's country, arrange inspection of the goods prior to shipment
- Arrange inspection of the goods by an acceptable independent inspection agency (this can be costly)
- Your contract of sale should be specific if the date for shipment is vital, a letter of credit can specify a latest shipment date, which if not met, may allow the importer clear legal grounds for refusing payment
- Have an alternate or secondary supplier available to source the goods from, this may limit damage caused by loss of supply
Credit risk is the risk of seller insolvency or other related parties in the payment chain.
- If full or partial payment is made to the supplier prior to shipment, the importer may find that any payments made are not returned.
- Your supplier may lack the financial means to ship your goods after you have made payment
How can credit risk be mitigated?
When a contract of sale specifies payment is to be made in a particular currency, a 'Transfer risk' may exist.
- A change in government regulations may prevent or restrict your ability to make payments or exchange foreign currency; many countries regulate the transfer of money and conversion of foreign currency receipts.
- Unexpected regulatory changes may occur without warning, meaning that transactions already agreed to may not be able to be completed, resulting in financial loss to either or both parties
Country risk may occur if government regulations prevents or restricts the movement of particular goods.
- This could occur during a significant event such as war, terrorism, government bankruptcy or economic embargoes.
- Many countries regulate the import and export of goods. Unexpected regulatory changes can occur without warning, such as cancellation of permits or licences, transactions already agreed to, may not be able to be completed, resulting in financial loss to either party
How can country risk be mitigated?
Consult with the Australian Customs Service for specialist knowledge of the markets with which you trade, you may consult with the Australian Customs Service.
Transport risk is the risk of damage, loss, theft or pilferage of goods whilst in transit from seller to buyer.
- Whether the goods are being transported by Sea, Air or other means (road/rail), the risks can be covered by insurance.
- Who pays for insurance and how the goods are insured is a matter of negotiation between the two parties involved, this should be included in the contract of sale
How can transport risk be mitigated?
- Ensure goods are adequately insured with claims payable in Australia
- Consult commercial marine insurance agencies, insurance brokers or freight forwarders to insure against transport risk
- Engage a freight forwarder or obtain independent advice from an insurance broker specialising in international transport