Avoiding Shipping Risks Case Study Paper
Marine cargo insurance is an essential business tool for import/export. Generally, coverage is sold on a warehouse-to-warehouse basis (i.e., from the sender’s factory to the receiver’s platform). Coverage usually ceases a specific number of days after the shipment is unloaded. Policies are purchased on a per shipment or “blanket” basis. Freight forwarders usually have a blanket policy to cover clients who do not have their own policy. Most insurance companies’ base cargo insurance on the value of all charges of the shipment (freight handling, etc.) plus 10 percent to cover unseen contingencies. Rates vary according to product, client’s track record, destination, and shipping method.
Ocean cargo insurance costs about $0.50 to $1.50 per $100 of invoice value. Air cargo is usually about 25 to 30 percent less.
Avoiding Political Risk
No two national export credit systems are identical. However, there are similarities, the greatest of which is the universal involvement of government through the export credit agency concerned and of the commercial banking sector through the workings of the system.
Most countries have export-import banks. In the United States, EXIMBank provides credit support in the form of loans, guarantees, and insurance. All EXIM branches cooperate with commercial banks in providing a number of arrangements to help exporters offer credit guarantees to commercial banks that finance export sales. The Overseas Private Investment Corporation (OPIC) and the Foreign Credit Insurance Association (FCIA) also provide insurance to exporters, enabling them to extend credit terms to their overseas buyers. Private insurers cover the normal commercial credit risks; EXIMBank assumes all liability for political risk.
For more information on FCIA, contact: FCIA, Marketing Department-11th Floor, 40 Rector Street, New York, NY 10006; phone: (212) 306-5000; fax: (212) 306-5218.
The programs available through OPIC and FCIA are well advertised and easily available. Commercial banks are essentially intermediaries to EXIMBank for export guarantees on loans (beginning at loans up to 1 year and ending at loans of 10 to 15 years). FCIA offers insurance in two basic maturities: (1) a short-term policy of up to 180 days, and (2) a medium-term policy from 181 days up to 5 years. You may also obtain a combination policy of those maturities. In addition, FCIA has a master policy offering blanket protection (one policy designed to provide coverage for all the exporter’s sales to overseas buyers).
Avoiding Foreign Exchange Risk
When the dollar is strong-as strong as it was in the early 1980s-traders prefer to deal in the dollar. When the opposite is true, traders begin to deal in other currencies. Of course, the dollar is as good as gold because it is a politically stable currency that is traded internationally. Because of its stability, it has become the vehicle currency for most international transactions.
So long as exporters deal only in their own currency, there is no foreign exchange risk. However, the strength and popularity of currencies are cyclical, and the dollar is not always the leader. Often, an exporter is faced with the prospect of pricing products or services in currencies other than dollars. Importers must buy foreign currency to pay for products and services from risk-avoiding foreign suppliers that demand payment in their own currency. In the current era of floating exchange rates, there are risks of exposure whenever cash flows are denominated in foreign currencies.
Exposure: The effect on a firm or an individual of a change in exchange rates.
Forward or future exchange rate: The rate (agreed-on price) that is contracted today for the delivery of a currency at a specified date in the future.
Hedging (covering): Use of the forward foreign exchange market to avoid foreign currency risk.
Successfully managing currency risk is imperative. No longer can an importer or exporter speculate by doing nothing, then pass foreign exchange losses on to customers in the form of higher prices. The best decision for an import/export business is to hedge or cover in the forward market when there is risk of exposure. To do otherwise is to be a speculator, not a businessperson. Use the forward rate for the date on which payment is required. This avoids all foreign exchange risk, is simple, and is reasonably inexpensive. The cost of a forward contract is small-the difference between the cost of the spot market (today’s cost of money) and the cost of the forward market. Major international banks and brokerage houses can help you arrange a foreign exchange forward contract. Spot and forward markets are quoted daily in the Journal of Commerce and the Wall Street Journal.
Chapter 3 explored your relationship with overseas distributors. A manufacturer or import/export business will seldom agree to all a distributor’s conditions. Most terms are negotiable, and a firm that is not internationally known may have to grant more demands than one that enjoys a more favorable position. The following tips may help you avoid risk in doing business with distributors:
Put the agency agreement in writing. The rights and obligations resulting from a written agreement require no extraneous proof and are all that is necessary to record or prove the terms of a contract in most countries.
Set forth the benefit to both parties. Well-balanced agreements should not place an excess of profitless burden on one of the parties. Performance of the agreement may be im possible to enforce against a party that has no apparent benefit from it.
Give clear definition and meaning to all contract terms. Many English terms that are spelled similarly in other languages have entirely different meanings. Require that the English version prevail when there is doubt. To avoid conflict, use INCOTERMS (see Chapter 2).
Expressly state the rights and obligations of the parties. The agency contract should contain a description of the rights and duties of each party, the nature and duration of the relationship, and the reasons for which the agreement may be terminated.
Specify a jurisdictional clause. If local laws allow it, specify a jurisdiction to handle any legal disputes that may arise. When possible, use arbitration. Basic arbitration rules and principles are universal. Clauses in the contract should identify the arbitration body or forum. Model arbitration clauses may be obtained from the American Arbitration Association, 140 West 51st Street, New York, NY 10020; phone (212) 484-4000, fax: (212) 765-4874; or from the U.S. Council for International Business, 1212 Avenue of the Americas, New York, NY 10036; phone: (212) 354-4480; fax: (212) 575-0327; Web: www.uscib.org.