Introduction to Political and Economic Risk/Activities

Unit 1.1-Introduction to Political and Economic Risk

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Activity

The purpose of this activity is to promote discussion and understanding of the differences and similarities of risks of slow or non-payment from domestic and international trade situations.

As a class or in smaller student groups, present ways you would respond to the following situations covering the risk and the possible mitigation of that risk.

Your customer has failed to obtain an import license. Evaluate:

the disposition of the goods and related costs
international risk of payment or recovery of the goods
the ability to acquire the license after the fact

Your customer is located in a land-locked country. The closest port is in a country that is at war. Evaluate:

alternative distribution channels and logistics
the use of insurance if the goods might be confiscated, embargoed, or destroyed by activities associated with a war
the financial impact of delays in delivery caused by the war or by alternative routes

Your customer is located in a country that has an unstable government. Evaluate:

the impact of foreign currency fluctuations and the use of hedging mechanisms to overcome them
an alternative form of payment to be employed such as bartering
the risk of nationalization by the government of private industries

Your customer is located in a country that has hyper-inflation and anyone who has liquid assets and the ability to move those assets out of the country is doing so. Evaluate:

the impact on the value of the currency in the open markets
the impact on the foreign currency reserves of the country
the impact of the central bank restricting payments outside their country under these circumstances

Your customer sends you a financial statement prepared by a local accounting firm. Evaluate:

the translation risk of the foreign assets and the impact of a major currency fluctuation against those assets
whether generally-accepted accounting practices apply internationally as well as domestically
the ability to get credit information on the company and from what sources

Your sales department has communicated with a new customer by fax and e-mail. The customer needs your company to start work on building a unique piece of machinery. The down payment and the purchase order will follow shortly. Evaluate:

the payment vehicles that could or should be employed before the manufacturing process begins
the need for an underlying contract to bind the parties in the transaction
the potential for miscommunication on the required needs or functionality of the machinery being ordered

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