CHAPTER TWO

THE INTERNATIONAL MONETARY SYSTEM

International monetary systems are sets of internationally agreed rules,
conventions and supporting institutions, that facilitate international trade, cross
border investment and generally the reallocation of capital between nation states.
The rules and procedures for exchanging national currencies are collectively
known as the international monetary system.
They provide means of payment acceptable buyers and sellers of different
nationality, including deferred payment. To operate successfully, they need to
inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and
to provide means by which global imbalances can be corrected.
Components of the international monetary system
Operation components include the following:
1. International Monetary Fund
The International Monetary Fund (IMF) is an international organization that
was created on July 22, 1944 at the Bretton Woods Conference and came into
existence on December 27, 1945 when 29 countries signed the Articles of
Agreement. It originally had 45 members. The IMF's stated goal was to stabilize
exchange rates and assist the reconstruction of the worlds international payment
system post-World War II.
Countries contribute money to a pool through a quota system from which countries
with payment imbalances can borrow funds temporarily. Through this activity and
1

others such as surveillance of its members' economies and policies, the IMF works
to improve the economies of its member countries. The IMF describes itself as an
organization countries, working to foster global monetary cooperation, secure
financial stability, facilitate international trade, promote high employment and
sustainable economic growth.
2. Foreign Exchange Market
The foreign exchange market is the framework for trading foreign currencies.
Financial centers around the world function as anchors of trading between a wide
range of different types of buyers and sellers around the clock, with the exception
of weekends. The foreign exchange market determines the relative values of
different currencies.
The foreign exchange market is unique because of the following characteristics:
1. its huge trading volume representing the largest asset class in the world leading
to high liquidity,
2.its geographical dispersion,
3. its continuous operation: 24 hours a day except weekends;
4. the variety of factors that affect exchange rates,
5. the low margins of relative profit compared with other markets of fixed income,
6. the use of leverage to enhance profit and loss margins and with respect to
account size.
3. Official Reserves
Governments hold official reserves, international money in various forms. Official
reserves only refer to foreign currency held by a country. These function like
international money by their general acceptability. Official reserves consist of four
separate

and

distinct
2

components.

1. The first component is the IMF Reserve Positions. This represents quotes of
IMF member countries freely available to them to supplement their liquid
resources.
2. The smallest component is the special drawing rights (SDR), also referred to as
paper gold. SDRs were created to supplement international liquidity at a time when
it was thought official reserve growth would be inadequate to meet global needs.
SDRs reflect bookkeeping entries within the IMF, which members in deficit can
use to settle international payment at the official level (central bank of one country
transferring

SDRs

to

central

bank

of

another

country)

3. The largest component consists of foreign exchange held by governments and

their

central

banks.

4. Finally, a part of official reserves is held in the form of monetary gold. A gold
reserve is the gold held by a central bank or nation intended as a store of value and
as a guarantee to redeem promises to pay depositors, note holders (e.g., paper
money),

or

trading

peers,

or

to

secure

currency.

Governments hold official reserves for numerous reasons. Some governments are
more concerned with the need to cover external debt payments, while others are
more interested in being able to cover the cost of necessary imports such as food
and fuel.
Factors influencing governments to hold official reserves include:
a) To be able to carry out international transactions including imports without any
delay in payments
b) To improve the international credit standing of the nation.
c) To provide resources for foreign exchange market intervention, when needed
3

d)

To

assure

and

facilitate

external

debt

service

payments.

4. Private Demand for Foreign Exchange

The private demand for foreign exchange refers to the foreign currency balances
held by foreign exchange banks. The term private demand is used in contrast with
official demand, where official reserves are held by the governments. Private
demand results from the risk versus profit judgments of the private trading banks.
When a large number of dealing banks become uncertain of the near future
prospects for a currency in the market, they may shorten their deposit holdings
5. Intervention and Swap Network
A swap involves a standby credit arrangement between two (or more) countries.
The swap is used to borrow or lend foreign currency in exchange for domestic
currency with a commitment to reverse the exchange in three months. A foreign
exchange swap is a sport purchase of a currency coupled with a forward sale.
Central banks use swaps to provide foreign currency resources to one another,
which are used to intervene in the foreign exchange market.
swap is a worldwide network of central banks that establish a reciprocal credit line
relationship to temporarily swap currencies.

Chapter three
FINANCING

OF

INTERNATIONAL

SERVICE

AND

PRODUCT

TRANSACTIONS
Settlement of international transactions:
Payment Methods Global sourcing often involves payment using various
methods as shown below:
1 Open account
this is similar to most home transactions. Goods are shipped and documents
remitted to the buyer with an invoince for payment on previously agreed terms,
such as net 30 days
2 Letter of credit transactions
it is a legal instrument constituting a cash guarantee, obligating the bank to make a
payment to a named beneficiary, such as an exporter, within a specified time
against the presentation of documents such as the bill of lading, certificate of
quality, insurance and origin, packing list and a commercial invoice.
The risk of non-payment by the buyer is therefore transferred to the issuing bank
An LOC is opened by an importer (applicant) to ensure that the documentation
requested proves that the seller has fulfilled the requirements of the underlying
sales contract by making such requirements conditions of the letter of credit(LOC)
From the exporters perspective, apart from cash in advance, an LOC is the most
secure method of payment in international trade. The conditional nature of an LOC
means that payment will not be made to the exporter unless all the credit terms
have been precisely met. LOC may be conditional, standby or transactional:
5

 a conditional LOC may require some burden of proof by the owner that the
contractor has not failed to perform before the bank will pay
a standby LOC is normally used for open accounts and deals only with
payment of documented sums within a specified period.
A transactional LOC applies to one specific transaction
Most LOCs are irrevocable, which means that both parties must agree to any
changes in terms. While LOCs are a very secure method of payment, the
security comes at a price. The security must therefore be weighed against the
cost of higher bank charges.
3 payments in advance:
This is the least secure and most secure method of payment from the standpoint
of buyers and sellers respectively. Often this method takes the form of a
payment up front of say, 50% of the selling price, with the reminder payable on
agreed credit terms.
4 bills for collection:
Under this system, the shipping documents- including the bill of lading (which is
a receipt signed by a ships master specifying the goods shipped on board and
constituting a negotiable bill of title to such goods) are sent to the buyers bank
rather than direct to the buyer. These will be handed to the importer only when
payment has been made (documents against payment) or against a promise to pay
(document against acceptance) and, until the documents are received, title to the
goods remains with the exporter.
Documents against acceptance are usually accompanied by a draft or bill of
exchange drawn on the buyer. Bills of exchange are the oldest methods of payment
for goods bought overseas.
6

A bill of exchange is defined as an unconditional order in writing, addressed by

one person to another, signed by the persons giving it, requiring the person to
whom it is addressed to pay on demand, or at a fixed or determined future date, a
sum certain in money to or to other order of a specified person or to the bearer.

. Documentation of international business transactions

Each individual order, whether it requires one complete shipment or several, will
need a set of documents to ensure its passage through customs, both in the sourcing
country and in the country of final destination. This package/documents typically
includes commercial invoices, packing lists, and certificates of origin, test reports,
third-party inspection reports, and certificates of compliance. These documents
may require consularization stamps or notary services to authenticate them as
original copies. Documents are also normally required in multiple copies to
different customer locations.

EXPORT & IMPORT DOCUMENTATION

Introduction
The acquisition of overseas customers, while in itself an achievement, is only the
first step in selling goods overseas. The job is not complete until your customer has
physically received the consignment. As much attention must be paid to the final
part of the order cycle which involves completing the documentation requirements,
arranging the transport and ensuring payment, as to securing the business.
Every exporter can recall some horror story which relates to problems with
documentation. Sometimes the problems are unavoidable, but in too many cases it
is the exporter who has not been careful enough in producing the required
7

documents.
Errors in documentation are very expensive. The first result of a mistake is delay to
the consignment which might be held up in a warehouse under customs control in
overseas country. Wherever the delay, storage charges will become payable almost
immediately, and these have a habit of rising disproportionately as the delay
extends from days to weeks and perhaps even months. Most customs authorities
have the reserve power to seize goods which have not been cleared of customs
within a certain period. The other danger of delay is the loss of confidence by the
customer. In addition, any delay in delivery may lead to a deferment in settlement
of the order, so cash flow is then affected.
Although such events occur every day, there is no need for exporters to expose
themselves to these additional costs. Documentation for exports is not that
complicated, and the number of documents which have to be prepared by exporters
is very few. They must, however, all be completed carefully and checked before
they are despatched.
Many of the other forms are completed by freight forwarders, hauliers, airlines and
shipping lines, as well as banks and other financial intermediaries. This chapter
looks at both the documents which exporters complete and those normally
completed by the suppliers of transport.
1.The invoice
1.1 Types of invoice
The most important form which the exporter has to prepare is the invoice. an
invoice must accompany every shipment even if the goods are being supplied free
of charge. The invoice is the basic document used in export, and every other
document draws upon the information that appears on the invoice. The purpose is
to confirm to the purchaser the terms of the transaction. There are several different
types of invoice. These include:
8

(a) Commercial invoice

(b) Proforma invoice.
(c) commercial invoice with declaration.
(d) certified invoice
(e) legalised invoice
(f) consular invoice.
It is advisable to print out invoices rather than completing them by hand. This is
not a legal requirement, but customs delays are less likely if the invoices are easily
read. There are several software packages available to produce invoices and other
export documentation.
Many countries insist on invoices being submitted in the language of the country of
destination. Even when this is not a stipulation, it is good practice, and will help
the goods through customs overseas more quickly.
(a) Commercial invoice
The most critical document in the export process, the commercial invoice links the
contract of sale between the buyer and seller and gives details of the goods being
purchased. It is issued by the exporter.
The information which should appear on an invoice is listed below.
(a) Full name and address of the consignor and consignee. If available, include the
telephone number of the consignee.
(b) A full description of the goods. This should include:
(i) the number of pieces. (ii) The dimensions of each parcel. (iii) The total weight
of all items. (iv) A full and accurate description of the goods.

This is essential for both customs and security procedures. Many companies tend
to describe their goods vaguely (for example machinery parts) and these shipments
are more likely to be delayed than those accurately described.
Hence , it is recommended to give as much information as possible of the goods
being shipped, for example,
(c) The total number of items in each of the packages being despatched.
(d) The tariff number of the item if this is available.
(e) The total value of the goods. Even for samples and free of charge goods.
(f) The reason for export. There should be a statement explaining whether the
goods are being sold, are samples or are being sent for repair or processing.
(g) The country of origin. this is important to ensure rates of duty are calculated
correctly or imported duty free as the case may be.
(h) Signature of exporter (this is the person responsible for sending the shipment).
There are other items which have to be included on some commercial invoices.
These include:
VAT registration number of the buyer this applies to transactions with other EU
Member States
details of the letter of credit if the goods are being shipped against a letter of credit
When sending fabrics, all countries require details of fibre content. Samples
should be marked sample or cut off 1 inches and the invoice must state that the
garment is mutilated.
When samples are being sent free of charge, customs authorities require an invoice
for customs purposes only. In this case the invoice is claused No commercial value.
Value for customs purposes only.
(b) Proforma invoice
10

Proforma invoices are prepared by the exporter and may be needed by the importer
for quotation purposes, to draw up a letter of credit or to apply for the foreign
exchange to pay for the goods. This applies to markets with exchange controls,
particularly in Africa and South America. The invoice is sent in advance of the
goods, but does not differ from a standard commercial invoice.
(c) Commercial invoice with declaration
Certain countries may require a specific declaration to be included on the invoice
in order to comply with certain import regulations in the country of destination.
(d) Certified invoice
Some countries require certified invoices, particularly when goods are being
shipped against letter of credit. These are invoices which are certified by a
Chamber of Commerce before goods are despatched. Exporters present the invoice
to the Chamber of Commerce, and they then stamp the document. The exporter
lodges authorised signatures with the local chambers who verify the signature
before stamping the document.
(e) Legalised invoice
occasionally, customs in the Middle East, require invoices to be both certified and
legalised. After certification, invoices have to be presented to the embassy of the
destination country for legalisation. This involves presentation of the certified
invoices to the embassy who then attach their stamp to the documents. Points to
remember when presenting legalised invoices are:
(a) Allow sufficient time for presentation as goods should not be despatched
before the invoices are legalised. Legalisation can take between five and seven
working days depending on the embassy concerned, and whether or not there is an
embassy.
(b) Embassies charge for legalisation either a flat fee or a percentage of the value
11

of the transaction.
Exporters should make allowance for what are often unexpected additional costs.
(f) Consular invoice
These are particularly common in South America. The details of the invoice are
transferred onto a standard form prepared by the country of destination. The
precise format of a consular invoice depends on the country of destination. All
details and supporting paperwork should be submitted to the countrys commercial
section prior to the despatch of the goods. (In some cases, the exporters invoice is
stamped and signed by the Consul of the importing county.) It is particularly
important to:
(a) Allow sufficient time for the procedure to be completed usually several days.
(b) Make an allowance in the quotation for consular fees which are often based on
the value of the consignment.
A consular invoice is usually needed in addition to a normal commercial invoice.
(g) Signed original invoices
Signed original invoices are occasionally sought by foreign countries. This means
that each individual invoice has to be signed. Even if the invoice is a photocopy, it
must still have an individual original signature. As most printed invoices are in
black ink, it is advisable to use blue ink for signing when an original signature is
required.
Conclusion
Regulations regarding invoices vary from one country to another, and change
frequently. For up to date information, shippers should consult before completing
the transaction. Amendments are published periodically.
Exporters should only despatch goods together with accompanying invoices. The
exception to this rule is for sales to other member states of the EU.
12

 The use of the fax can reduce customs delays. However, many customs
authorities in other parts of the world do not accept a fax as a substitute for an
original invoice.
If you are unsure which invoice to send with the shipment you should ask your
customer?
2. Origin Certificates
2.1 Purpose and types
In many cases, exporters have to obtain an origin certificate to accompany the
invoice. The purpose of these certificates is:
(a) To confirm the origin of the goods (also known as non-preferential origin). The
certificates used are called a Certificate of Origin.
(b) To allow the consignment to benefit from a reduced or zero rate of duty in the
country of import (also known as preferential origin).
An origin certificate can either be:
a prepared and signed statement which appears on an invoice.
A separate form which has to be authorised by Customs & Excise or a Chamber
of Commerce and/or the embassy of the country of destination.
(3) Certificate of conformity
some countries demand that all goods require a certificate of conformity. The
certificate of conformity confirms that the goods comply with standards issued by
the importing country.
Features of a certificate of conformity are:
(a) The certificate has to be obtained prior to shipment.
(b) Many countries appoint an exclusive organisation worldwide to issue
certificates of conformity.
13

These organisations frequently verify consignments before issuing a certificate of

conformity.
(c) Goods arriving at a frontier without a certificate of conformity are likely to be
impounded or confiscated.
Exporters should remember that the certification companies charge for this service,
and should allow for these costs when preparing quotations.
(4) Certificate of value
The exporter confirms that the certificate containing the true and full statement of
the price for the goods and that there is no other understanding between the
exporter and the importer about the purchase price. (Many countries depend on
import duties for a large part of their national revenue and may insist on a
certificate of value.)
(5) Certificate of health
some countries require a health or sanitary certificate when animals, animal
products, fish, plants and food products are exported. These certificates confirm
that the goods are free from disease or pests (insects), and that products have been
prepared in such a way that they reach prescribed standards. Normally, these
certificates are issued by the Department of Agriculture.
6. Bill of Lading
6.1 Function
One of the oldest documents used in international trade is the bill of lading. Today,
the bill of lading is still an important document which is used in virtually all
circumstances when goods are being shipped overseas by container or
conventional vessel. The functions of a bill of lading are the following:
(a) A document of title: this distinguishes a bill of lading from all other transport
documents. Transfer of an original bill of lading also means that ownership of the
14

goods passes to another party. This is why a bill of lading is an extremely valuable
document, and must be kept securely at all times. The negotiability of a bill of
lading depends on how it is completed.
(b) A contract of carriage: the bill of lading is evidence of a contract of carriage
between the consignor and the shipping line. One of the main conditions of the
contract of carriage allows the shipping line to raise charges for the freight.
(c) A receipt for the goods: the shipping line checks the goods as they are loaded
and then issues the bill of lading, which is therefore a receipt for the goods. If there
are no clauses on the bill of lading, it is known as a clean bill of lading. In many
cases, cargo might be damaged or packing inadequate, and the bill of lading is then
claused accordingly e.g. leaking drum, inadequate packing. This then means the
bill of lading is a claused bill of lading and this causes a lot of problems to the
shipper.
Unlike any other transport document, the bill of lading allows the exporter to have
almost total control of the shipment even when it is thousands of miles away. The
consignee cannot obtain the goods without an original bill of lading; the consignor
can retain the original bill until, for example, full payment has been made.
There are many types of bill of lading as follows:
(a) shipped bill of lading
(b) Received bill of lading
(c) Through bill of lading
(d) House bill of lading
(e) Clean bill of lading
(f) Combined transport bill of lading

15

(g) Negotiable bill of lading

(h) FIATA multimodal transport bill of lading.
6.2 Legal framework Bills of Lading
6.2.1 Relevant legislation
The law which governs the use of bills of lading is the Shipping (Liability of Ship
owners and Others) Act1996. Goods at sea are usually subject to the Hague-Visby
Rules or the Hamburg Rules. The Hague-Visby Rules were introduced in Ireland
through the Shipping (Liability of Ship owners and Others) Act 1996.
6.3 Procedures for a bill of lading
6.3.1 Information required
There are many types of bill of lading. The main pieces of information required
are:
(a) The parties involved (consignor, consignee and notify party)
(b) ports of loading and discharge and place of delivery
(c) Name of vessel and voyage reference number
(d) Description of the goods this is often just the number of a container and some
brief information e.g. Container XXLU 4908761 said to contain 180 cartons
footwear;
(e) volumetric measurement (m3) and gross weight in kilos
(f) number of original bills of lading
(g) Details of freight payment prepaid or forward
(h) Marks.
6.3.2 Number of bills of lading
Most shipping lines issue two or three original bills of lading and several copies.
16

The originals and copies are all stamped accordingly.

The original bill of lading is a valuable document. The copies are used for various
administrative tasks such as invoicing and customs formalities.
6.4 Types of bills of lading
6.4.1 Shipped bill of lading
This is one of the most common forms of bill of lading . The bill, when signed,
confirms that the goods are on the vessel and have been shipped on board.
6.4.2 Received bill of lading
The received bill of lading confirms that the goods have been received for
shipment. Frequently received bills of lading are issued by the shipping lines
agents. The goods have not necessarily been shipped, but are required by the
exporter for finance.
Problems can sometimes arise with the received bill of lading in that the shipping
line might become embroiled in disputes about loss or damage to the cargo before
the goods are on the vessel. Equally, the shipper can become confused by the
division of responsibilities between the shipping lines agent and the shipping line.
6.4.3 Through bill of lading/combined transport bill of lading
The through bill of lading is growing in popularity, and is widely used when
containers are transferred from one shipping line to another or moved from the port
inland. The Ocean carrier takes responsibility for the transhipment and selection of
the on carrying vessel. The through bill of lading covers the complete journey, and
means the shipping line can quote one freight rate to cover the whole journey. The
combined transport bill of lading, similar to the through bill of lading, is widely
used when more than one mode of transport is used, e.g. road and sea or rail and
sea.
6.4.4 House bill of lading
Freight forwarders frequently group several consignments for the same destination
17

together in one container referred to as groupage or consolidation.T he shipping

line issues one shipped bill of lading to the forwarder who then issues separate
house bills of lading to each consignor. These bills of lading (unless a FIATA
multimodal transport bill of lading) do not have the same legal force as a shipping
line bill, and might be unacceptable to the bank for a letter of credit transaction.
6.4.5 Clean bill of lading
A bill of lading which remains unclaused is a clean bill of lading. This means the
shipping line accepts their full liability under the Hague-Visby Rules .
6.4.6 Negotiable bill of lading
Most bills of lading are negotiable which means they can be endorsed and
ownership of the goods then passes to another party. Bills of lading which are nonnegotiable usually have the words non-negotiable prominently displayed.
6.4.7 FIATA multimodal transport bill of lading
The FIATA bill of lading has been created to solve the problems encountered with
house bills of lading. Freight forwarders who meet certain criteria belong to FIATA
(International Federation of Freight Forwarders Associations) and can issue FIATA
bills of lading.
These bills of lading are acceptable under the ICC Rules Uniform Customs and
Practice for Documentary Credits. The main advantage of the FIATA bill of lading
is that it can be used for various combinations of transport, including road. It also
allows shippers to use freight forwarders door-to-door groupage services even if
the shipment is against a letter of credit.
6.5 Problems with bills of lading
6.5.1 Examples
There are hundreds of legal precedents which have framed custom and practice
regarding bills of lading. All these cases have arisen when something went wrong,
and the dispute ended up in the courts. The delivery of cargo without bills of lading
18

remains the largest single cause of claims against both liner and port agents.
Shippers should always ensure their customer overseas has:
(a) the original bill of lading
(b) the correct bill of lading.
The alternative when a bill of lading is lost is to obtain a letter of indemnity, to
which special rules attach.
Common problems arising with bills of lading are:
(a) Stale bill of lading: a stale bill of lading is a bill which arrives at the port after
the goods have arrived. The delay inevitably means the cargo cannot be
released, and there are demurrage charges to be paid before the goods are
released. If a bill of lading is not presented within the time limit stipulated
(normally 21 days after shipment), banks also regard the bill of lading as stale.
(b) Claused bill of lading: when the shipping line wants to amend any of the
clauses in the bill of lading, some comments are added to the document. This
can occur when the goods are damaged, wet, or when the number of items does
not tally with the number stated on the bill of lading. The bill of lading then
becomes a claused bill of lading. A claused bill might be rejected by a bank.
(c) Loss of bills of lading: one of the commonest problems with bills of lading
is their loss, often in the postal system. This can be avoided if the shipping line
issues two or three originals, and one original bill is held by the shipper as an
insurance policy in the event of loss. It is usual practice to send the original
bills of lading under separate cover on successive days to minimise the danger
of loss of these important documents in the post. Courier companies are an
19

alternative. If an original bill of lading is irretrievably lost, the shipping line

will only issue a duplicate if it is given a letter of indemnity by the consignee
(or shipper) which will cover its potential liability in case anyone ever presents
the original bill in the future. Most shipping lines have strict rules about
releasing goods without a bill of lading. The usual option is to deliver cargo
against a letter of indemnity. The indemnity means that the carrier can obtain
compensation for any amounts of money which it might have to pay to the
holder of the original bill of lading. Because of the potential liabilities which
can arise with an indemnity there are several rules to follow;
(i) The exporter must provide written authority for the issue of a letter of
indemnity. The wording of the letter and the security should also be formally
agreed.
(ii) The owner of the cargo (often the exporter) must authorise the release of
the cargo in writing. Unscrupulous people have obtained valuable cargoes by
sending forged faxes which have led to the release of goods.
(iii) Ensure that the letter of indemnity is countersigned by a first class bank.
Some people have issued forged bank indemnities - delivering valuable cargo
against a rubber stamp is not advisable.
(iv) Ensure that the indemnity has an adequate time limit. The usual statutory
period is six years plus one additional year as a precaution making a total of
seven years.
(v) Ensure that the indemnity matches the quantity and value of the cargo.
Indemnities issued might be unlimited (because the shipping line is wary of
consequential loss) or for a specified amount usually a multiple of the CIF
value of the goods. When all the original bills of lading are lost, and the
shipment is subject to a letter of credit, the shipping line will usually agree to
the issue of another bill of lading against a bank endorsed indemnity. Most
20

carriers insist on keeping the bank indemnity valid for ten years.
(d) Discrepancies: there are errors with bills of lading which mean they do not
reflect the terms of the letter of credit and so are rejected by the bank. For
example: the goods might be shipped after the expiry date of the letter of
credit,
(i)
The wrong type of bill of lading might be used.
(ii)
presentation of the bill might be late
(iii) The bill might not give a consistent description of the goods.
6.4.2 Action to take in the event of a mistake
The bill of lading is a valuable and important document, and must be
completed correctly. If the shipping line makes any type of mistake, exporters
should point this out, and ask for an amended set or a new set. However, all
the originals should be returned to the shipping line.
Shipping lines also have a duty of accuracy, and can be expected to put correct
shipping dates on a bill of lading, so that the document complies with a letter
of credit.
6.4.3 Bill of lading fraud
Fraudulent bills of lading have been a major problem for many years, and all
shippers should be aware of some of the most common methods used;
(a) Mis-dating the bill of lading. Shippers might ask the shipping line to
confirm loading of goods prior to or after the actual date of loading.
(b) Incorrect description. Shippers want their cargo to be accepted clean on
board. However, if cargo does appear damaged, clausing the bill of lading as
clean on board is fraudulent.
(c) Shipped on board. Bills of lading might be claused shipped on board even
before the cargo has been loaded or even before the ship arrives in the port.
21

(d) Conventional cargo . A particular problem occurs with conventional cargo

which has been shipped on deck, but the bill of lading is claused as shipped
under deck.
(e) Incorrect port of shipment. An incorrect port of shipment is inserted to
conceal the origin of the goods, perhaps for sanction busting or quota reasons.
7 .Sea Waybill
7.1 Functions
The sea waybill is becoming more widely used as an alternative to the bill of
lading. The functions of a sea waybill are:
(a) Receipt for the goods.
(b) Contract of carriage.
7.2 Advantages
A sea waybill is not a document of title, unlike a bill of lading. The advantages
of a sea waybill are:
(a) It is non-negotiable, and the consignee does not need a copy to obtain
delivery of the goods. This is an advantage for short sea journeys when there
might not be enough time to process a bill of lading, and when dealing with
credit-worthy and long-standing customers.
(b) It is a contract between shipper and shipping line without the involvement
of the consignee.
(c) It is ideal for through movement of cargo from door-to-door.
(d) It can be easily used by shippers and freight forwarders alike.
8. Air Waybill
8.1 Types
The air waybill is used for all air freight. There are two main types of air
22

waybill:
(a) Air waybill often abbreviated to MAWB. These are produced by airlines,
and each waybill has 11 digits in three parts: (i) The first three digits are the
airline prefix. (ii) The next seven digits are the serial number of the air
waybill. (iii) The last digit is the check digit. The purpose of the check digit is
to minimise computer error. The last figure of every air waybill is between 1
and 6 - never7, 8 or 9.
(b) House air waybill often abbreviated to HAWB. These are produced by
freight forwarders; they are used in much the same way as a house bill of
lading .The airline produces a master air waybill which has freight forwarders
as consignor and consignee. The freight forwarder then issues individual
house air waybills for every shipment.
8.2 Functions of an Air Waybill
The air waybill has several functions:
(a) A legally binding contract of carriage between the shipper and the airline.
(b) A guide to airline staff informing them about the shipment and including
special handling instructions.
(c) A certificate of insurance.
(d) A method of invoicing for freight and other charges.
The air waybill must consist of three original copies with a minimum of six
copies and a maximum of 11 additional copies. The distribution of the three
original air waybills is as follows:
(a) Green copy marked for the issuing carrier and retained by the airline. It
serves as an accounting document for the issuing carrier and being signed by
the shipper is proof of the contract of carriage.
23

(b) Pink or red copy marked for consignee. This accompanies the goods, and
is signed by the consignee upon delivery.
(c) Blue - marked for shipper. Given to the shipper it serves as a proof of
receipt of the goods for shipment and documentary evidence of the contract of
carriage.
At the top of the air waybill are the words non-negotiable (or not negotiable).
The air waybill is non-negotiable, and cannot be endorsed over to another
party. This is a major difference between an airway bill and a bill of lading.
8.3 How to use an air waybill
The main pieces of information required for an air waybill are:
(a) Shippers and consignees name and address.
(b) Issuing carriers agent and agents IATA code.
(c) Airport of departure and airport of destination.
(d) Handling of information box. In this box, details of special instructions are
provided on dangerous goods information, live animals information and
special handling instructions on the temperature requirements of the cargo.
(e) Declared value of the goods. This is divided into three:
(i) Value for carriage this can be any amount specified by the shipper or no
value might be declared. The amount in this box affects the airlines
responsibility in case of loss or damage to the consignment it can also affect
the freight rate.
(ii) Value for Customs this is the value declared by the exporter for customs.
(iii) Value for insurance this is the amount of insurance the shipper might
insure the cargo for through the airline. Most exporters prefer to take out
insurance through their own nominated broker.
24

(f) Description of the goods this includes the gross weight (in kilos), the
number of pieces, the nature of the goods, the dimensions and the chargeable
weight. The chargeable weight is the number of kilos on which the freight is
being levied. For volumetric shipments, the chargeable weight is always larger
than the actual weight of the shipment.
(g) Details of charges. These appear in the lower left side of the air waybill,
and charges are either prepaid or collect. Prepaid means the exporter pays, and
charges collect means the consignee pays.
(h) The shipper and the issuing carrier sign separate boxes of the air waybill
which establishes a contract of carriage between the two parties.
8.4 The importance of the air waybill
(a) The air waybill is used throughout the air journey, and even if the
consignment is passed from one airline to another, the same waybill continues
to be used.
(b) The language of the air waybill is the language of the country of origin.
(c) Erasures are not allowed, but alterations can be made as long as they are
authenticated

by

the

consignors

signature

or

initials.

(d) The number of the air waybill is used to trace consignments throughout
their journey; without the number of the air waybill, no information on a
consignment
9.

is
Courier

9.1

available.
Waybill
Function

The couriers and integrated operators are an important part of international

transport, and carry freights well as their traditional market of documents. This
group relies on a different and shorter form of airway bill which exporters
25

complete
9.2

prior
The

to

importance

of

the

shipment.
courier

waybill

(a) The waybill covers all methods of transport and worldwide destinations.
(b) The shipper has a number of options which cover service requirements.
the shipper can choose between express documents, express parcels or express
freight. There are also questions about insurance.
(c) Many of these companies do not recognise Inco-terms , but rather just ask
the shipper to choose between sender pays or receiver pays. No interim
transfer of responsibility is available.
(d) The waybill is used as the basis for customs clearance procedures both in
country of export and in the country of destination.
(e) The conditions of carriage are printed on the back of the waybill. Neither
the conditions nor the limitation of liability are standardised, and each
integrated operator will establish its own conditions. Shippers should satisfy
themselves that the conditions of carriage are acceptable before handing a
shipment to a courier or an integrated operator.
9.3 Main features of a courier waybill
The main information required to complete a courier waybill is:
From and to - shippers and consignees full name and address including a
telephone number. Many couriers refuse goods consigned to P.O. box
numbers.
10. Certificate of Shipment
10.1 Purpose
Exporters frequently come across a certificate of shipment which is a
document issued by a freight forwarder with the following purpose:
confirmation that the goods have been despatched overseas;
26

fulfilment of proof of despatch requirements for VAT purposes.

10.2 Content and use
The certificate of shipment contains details of the consignment including:
(a) Name and address of shipper and consignee.
(b) Receiving or clearing agent at destination.
(c) Routeing name of vessel, ports of loading and discharge and final
destination.
(d) Terms of delivery (Inco-terms).
(e) Description of the goods marks, weight and measurement.
(f) Exporters invoice number and date.
The certificate of shipment is used particularly for trade within Europe. It has
value for the exporter, but is not a replacement for the standard transport
documents such as a CMR note, bill of lading, air way bill or CIM note.

FOREIGN EXCHANGE MARKETS

Introduction
Foreign exchange market ( forex, or currency market) is a global decentralized
market for the trading of currencies. This includes all the aspects of buying, selling
27

and exchanging currencies at current or determined prices. Foreign exchange

markets are markets in which currencies of different countries are traded. These
markets are needed because people who sell goods typically want to be paid in the
currency of their own country.
Foreign exchange rate is also known as exchange rate, forex rate between two
currencies. This is a rate at which one currency will be exchanged for another
currency in relation to another currency for example an inter bank exchange rate of
119 Japanese yen (JPY,) to the United States dollar (US $) means that 119 will be
exchanged for each us $ 1 or that us $ 1 will be exchanged for each 119.
Types of foreign exchange rates
a) Fixed exchange rate

This refers to a system in which exchange rate for a currency is fixed by the
government. The basic purpose of adopting this system is to ensure stability in
foreign trade and capital movements
To achieve stability, government undertakes the duty to buy foreign currency when
the exchange rate becomes weaker, sell foreign currency when the exchange rate
gets stronger. When value of domestic currency is fixed to the value of another
currency it is known as pegging.
Under this system each country keeps value of its currency fixed in terms of some
external standard examples of countries practice this type of exchange rate
include; Hong Kong fixed the Hong Kong dollar, Denmark fixed the Danish kroner
and Bermuda the Bermudian dollar
b) Flexible exchange rate

28

This refers to a system in which exchange rate is determined by forces of demand

and supply of different currencies in the foreign exchange market. The value of
currency is allowed to fluctuate freely according to change in demand and supply
and foreign exchange.
There is no official (government) intervention in foreign exchange rate. The
exchange rate is determined by market .i.e. through interactions of thousands
banks, firms and other institutions seeking to buy and sell currency for purposes of
making transactions in foreign exchange.
Examples of countries that implement the flexible exchange rate include; Uganda
which uses a Ugandan shilling as a domestic currency, United States uses US
dollar, European Union uses a Euro, Japan a Japanese Yen and Great Britain a
pound
Managed floating rate system (dirty floating)

This refers to a system in which foreign exchange rate is determined by market

forces and central bank influences the exchange rate through intervention in the
foreign exchange rate.
In this system central bank intervenes in the foreign exchange market to restrict the
fluctuations in the exchange rate within certain limits. The aim is to keep exchange
rate close to desired target values. It is also known as dirty floating
For this, central banks maintain reserves of foreign exchange to ensure that
exchange rate stays within targeted value.
Others include;
Spot rate

29

Spot rate of exchange is the rate at which foreign exchange is made available on
the spot. It is also known as cable rate or telegraphic transfer rate because at this
rate cable or telegraphic sale and purchase of foreign exchange can be arranged
immediately Spot rate is quoted differently for buyers and sellers
e.g. $ 1=Rs 15.50 for buyers and $ 1=Rs 15.30 for the seller. This difference is due
to the transport charges, insurance charges, insurance exchanges, dealers
commission to mention. These costs are to be born by the buyers.
Forward rate.
Forward rate of exchange is the rate at which the future contract for foreign
currency is made. The forward exchange rate is settled now and the actual sale and
purchase of foreign exchange occurs in the future. It is quoted at premium or
discount ever/spot rate.
Long rate
Long rate of exchange is the rate at which a bank purchases or sells foreign
currency bills which are payable at a fixed future date. The basis of the long rate
exchange is the interest on the delayed payment.
Multiple rates.
This refers to system in which a country adopts more than one rate of exchange for
its currency. Different exchange rates are fixed for importers, exporters and for
different countries.
Two-tier exchange rate system

30

Is a form of multiple exchange rate system in which a country maintains two

currencies thats to say a higher rate for commercial transaction and a lower rate
for capital transactions.

The effect of the exchange rate on business depends on several factors

1. Elasticity of demand. If there is depreciation in the value of the Pound, the
impact depends on elasticity of demand. If UK firms are selling goods which are
price inelastic, then the fall in their foreign price will only have a relatively small
increase in demand. If exports are price sensitive, then there will be a bigger
percentage increase in demand. Evidence suggests that British goods are
increasingly price inelastic and after depreciation there is a relatively small
increase in demand.
2. Economic growth in other countries. In 2009/10, there was a significant
depreciation in the value of the Pound, however, the global economy (and EU in
particular) were in recession. Therefore, demand for UK exports was weak
despite the lower price.
3. Depends on percentage of raw materials imported. If a UK firm imports raw
materials and sells to the domestic market, it may lose out from a depreciation. If a
firm imports only a small percentage of raw materials from abroad and sells to
Europe, then it will benefit more from a depreciation.
4. It depends why there was an appreciation / depreciation. If there is an
appreciation in the Pound because UK labour productivity is increasing, then firms
are likely to be able to absorb the stronger Pound. However, if the Pound rises due
to speculation or weakness of other countries (e.g. Euro crisis in 2011) then firms
31

may become uncompetitive because the rise in the value of Pound is not related to
increased productivity and competitiveness.
5. Inflation? One possible problem of depreciation is that it could cause inflation.
If inflation does result, then firms could face costs, such as greater uncertainty.
6. Fixed contracts. Many business use fixed contracts for buying imported raw
materials. This means temporary fluctuations in the exchange rate will have little
effect. The price of buying imports will be set for up to 12 or 18 months ahead.
Exporters may also use future options to hedge against dramatic movements in the
exchange rate. These fixed contracts help to reduce the uncertainty around
exchange rate movements and mean there can be time lags between changes in the
exchange rate and changing costs for business.
Quotations
A quotation is a business offer made by a seller to an interested buyer to sell certain
goods at specific prices and on certain terms and conditions
Any foreign exchange market quotation always uses the abbreviation of the
currency under question. There are standard currency keys or currency codes that
have been created by international standards organization. these keys are used for
transactions worldwide for example USD for a United States dollar, GBP for
Great Britain Pound, Ugx for Ugandan shillings.
Different types of foreign exchange quotation.
Direct quotation.
Here, the quote is expressed in terms of domestic currency. This means that the rate
expresses how one unit of domestic currency were to be exchanged, how many
32

units of the foreign currency would it beget. This method is also alternatively
referred to as the price quotation method.
Therefore, if the value of the domestic currency increases a smaller amount of it
would have to be exchanged, conversely a decline in value would create a situation
where a large amount of the domestic currency would have to be exchanged.
Hence it can be said that the quotation rate has an inverse relationship with the
value of the domestic currency.
The value of the domestic currency is assumed to be 1 in case of a direct quotation.
The price being quoted explains the number of units of foreign currency that can
be exchanged for a single unit of domestic currency.
The direct quote method is one of the most widely used quotation method across
the world. This is the norm for quoting forex price and is assumed to facto until
another method has been explicitly mentioned
Indirect quotation
here, the quote is expressed in terms of foreign currency. Therefore this rate
assumed one unit of foreign currency, it then express how many units of domestic
currency are required to obtain a single unit of foreign currency sometimes this
quote is also expressed in terms of 100 units of foreign currency. This method is
after referred to as the quantity quotation method.
Since the method is quoted in terms of foreign currency, the quoted rate has a
direct correlation with the domestic rate, if the quoted goes up, so does the value of
the domestic currency.

33

The usage of indirect currency quotation is extremely rare it is only in the common
wealth countries like United Kingdom and Australia that the indirect quotation
method is used as a result of convention.

International Financial instrument

These are monetary contract between parties. International accounting standards
IAS 32 and 39 defines financial instruments as many contracts that give rise to a
financial asset of one entity and financial liability of equity instruments of another
entity.
Financial instruments can be created, traded, modified and settled. They can be
cash (currency), evidence of the ownership interest in an entity (share), or a
contractual right to receive or deliver cash (bond).
Types of International financial instruments
Financial instruments can be either cash instrument or derivative instruments.
Cash instruments: -are instruments whose value is determined directly by the
markets. They can be securities which are readily transferable and instruments such
as loans and deposits, where both borrower and lender have to agree on transfer.
Derivative instruments: - instruments which derive their value from the value and
characteristics of one or more underlying entities such as an asset, index or interest
rate. They can be exchange traded derivatives or over the counter derivatives.
Examples of International financial instruments include, trade finance instruments
syndicated loans Eurobonds as well as instruments of international financial
institutions
34

International parity conditions

Parity conditions in international finance include the following
Parity conditions that should apply to product prices, interest rates and spot &
forward exchange rates if the markets are not impended. These parity conditions
provide the foundation for much of the theory and practice of international finance.
Purchasing power parity. If international arbitrage enforces the law of one price,
and the exchange rate between the home currency and foreign goods. This
relationship is called purchasing power parity
The purchasing power parity theory is one of the early theories of exchange rate
determination. This theory is based on the concept that the demand for a countrys
currency is derived from the demand for the goods that this country produces
There are two forms of purchasing power parity as mentioned below;
Absolute purchasing power parity, this is spot exchange rate and is determined
by relative prices of similar basket of goods.
Relative purchasing power parity is the relative change in prices between countries
determines change in forex rate.

RISK MANAGEMENT IN INTERNATIONAL BUSINESS

Introduction.

35

Risk refers to future uncertainty about deviation from expected earnings or

expected outcome. It can also be the probability that actual return on an investment
will be lower than the expected return. A risk can also be defined as the probability
or threat of damage, injury, liability, loss or any other negative occurrence that is
caused by external or internal vulnerabilities and that maybe avoided through
preemptive action.
Risk Management is the process of identifying, quantifying and managing the
risks that an organization faces. As the outcomes of the business activities are
uncertain they are said to have some element of risk. Risk Management is the
systematic application of management policies, procedures and practices to the
tasks of establishing the context, identifying, analyzing, assessing, treating and
communicating.
Risk Management Process
The process of risk management consists of several steps as follows:i.

Defining Objectives
This is a key step as it forms the basis for all risk management activities on
the project. It is important that the project objectives are recorded and
understood by all participants. This involves identifying project
requirements, stakeholders and developing an understanding of the success
criteria for the project. Requirements must be assessed and challenged at
this point to ensure they are realist and understood by all team members. At
this point base assumptions relating to the project and key constraints must
also be reviewed.

ii.

Risk Management Plan

36

The purpose of the risk management plan (RMP) is to formalize the risk
management process for the project. It is a single document that contains
the definition of the chosen risk management process to be undertaken. It
includes the scope and objectives of the risk process, roles and
responsibilities of the participants, the tools and techniques to be
implemented, deliverables, review and reporting cycle. The risk
management plan provides a document for all to relate.
iii.

Identification
The identification of project risk can use a variety of identification
techniques such as brainstorming, interviewing, mind mapping among
others. It should be comprehensive and consistent and identified risks
should be given names that are meaningful to anyone whether they have
intimate knowledge or not. It will be impossible to avoid all risk on any
given project. However the key objective of comprehensive risk
identification is that risks are undertaken knowingly rather than unwittingly

iv.

Assessment
Risks must be assessed objectively so that key risks can be prioritized and
effective strategies to deal with them developed. This focuses management
attention on the key issues. Two assessment methods can be employed and
these include:Qualitative assessment provides a descriptive result and allows the relative
ranking of risk issues. This is applicable to any project of any size and is
always undertaken first. Quantitative assessment provides a mathematical
description of risk and produces a numerical result (risk estimate).
Quantitative assessment is undertaken to address specific issues that
warrant a detailed analysis.
37

v.

Planning
Once the risks have been identified, it is important that the responses to
be implemented to deal with them be thought out in some detail to
achieve appropriate, achievable and affordable action plans.
Risks are assigned to risk owners who are individuals best placed to
deal with given issues. Each action owner must then develop a
management plan with review dates. This establishes who is going to do
what and by when to mitigate the risks.

vi.

Management
Effective management of risk requires ongoing review of the action
plans and adjustment of strategies to respond to risk in response to risk
to the fluid situation as the project progress. It requires ongoing
diagnosis of the current position with respect to risk, identifying the
best alternatives and generally sustaining the process.

vii.

Feedback
Effective feedback is a key vehicle to learn from success and mistakes.
During the project. It allows for continuous re-evaluation of the
situation with the respect to risk and adjustment of the responses to
ensure a successful outcome. Over the course of many projects, it
allows businesses to continuously improve their planning and
estimating, and the risk management process itself.

viii.

Monitor and Review: Monitoring of all risks and regular review of the
risk profile is a key part of effective risk management.

RISK MANAGEMENT TECHNIQUES

38

Your plan will only be effective as the tools and techniques you use. Choosing
the right tools and techniques will help to reduce the complexity of the risk
management. The identification, evaluation and mitigation of risks can be
carried out with both formal and informal tools and techniques. Your choices
must allow you to have control over companys risks.
Although nothing is set in stone, there are good practical examples of risk
management tools and techniques.
Risk Management Stages
Risk identification
Quantitative analysis
Qualitative analysis
Responses
Monitoring

The following are some established tools and techniques for each stage and
these include:1. Risk Register, is the mother of all risk management tools and
techniques. It tracks the risks throughout the project life cycle. It acts
like a snap shot of what is going on with the project risks. Risk registers
are normally Excel spread sheets. As well as helping to keep the project
on track, they are useful for providing information for lessons learnt
document.
2. Risk Identification, to successfully identify risk, you must think of
every possible eventuality. The problem is that there are some things
that you just wont know. This is where the following tools and
techniques are used to discover hidden risks.
a) Delphi technique is where a panel of experts are asked to answer
39

questionnaires in a series of rounds. The idea is to question deeply

enough to get unbiased information that the experts agree on.
b) Root cause analysis is going at the cause of the problem to find out
whether the full effects can be prevented.
c) Diagramming techniques are compact versions of the risks. They
can include diagrams, flow charts and influence diagrams

d) .Bench marking is a comparison between period and or

departments. Anomalies in bench marking data can spot risks that
may have been missed if analysis was done in isolation.

3. Quantitative Risk Analysis, Tools and techniques can be used to

numerically analyze the impact a risk will have on an organization.
Quantitative techniques are generally more complex than qualitative
ones. Poor quantitative risk analysis methods include;
e) Failure Modes And Effects Analysis (FMEA) is an evaluation
to determine how and when the process might fail. Action is then
taken to address the parts of the process where failure is.
f) Sensitivity Analysis is where different variables are introduced
to show the impact on the risks. This analysis shows what would
happen if production fails to materialize.
g) Decision tree. (Is a diagram with branches that show the
outcomes of different decisions and random events. Decision
trees should be coupled with expected monetary value technique
to show the financial impacts of different outcomes.
40

4.

Qualitative Risk Analysis, qualitative risk analysis tools and

techniques can help you to decide which risks to focus on. These
include:
a) Red, Amber, Green (RAG) status. Is a method that divides risks
into three groups. The criteria for each group will normally depend on
the quality and time impact as well as the likelihood of occurrence. Red
risk is the one that will have the biggest impact and green risk will have
no or very low impact.
h) Risk urgency assessment can be used narrow down the risks
identified in the RAG status. This technique focuses on the
timing element of risks. Priority is given to the most imminent
risks.
Responses to risks.
After the quantitative and qualitative analysis has been done, you
then need to put together suitable responses to address the risks.
The following responses can be used on their own or as a
combination:
Avoidance or removal is where a circumstance around the
risk has been changed, so the risk no longer exists.
Mitigation is also known as risk reduction. This action is
taken to lessen the chance or impact of the risk.
Transference is shifting the risk and the impact to a third
party. For example insurer.
Acceptance of the risk involves drawing up a plan B or
contingency plan to deal with the impact.

5. Risk monitoring. Keeping a watchful eye on the risk management plan

41

will ensure that nothing slips through the crack. You should familiarize
yourself with risk triggers to know when an action needs to be taken.
The system below will help you to track your risks;
i) Status Meetings should be used to report on the progress of risk
management. Frequent status meetings ensure that risks are at
the forefront of peoples minds.
j) Risk Audits need to be done to evaluate how effective the
responses to risks have been. Audits can also be used to assess
the risk management process. The format objectives and findings
of a risk audit needs to be clearly documented to improve the
risks management process.
Tools and techniques that are not used effectively wont help with tour
risk management. It could take sometimes find which ones suit your
business. The good news is that there is plenty to choose from so you
can move to the next if a particular tool or technique isnt working.
POLITICAL RISK
This refers to the type of risk faced by Investors, corporations and governments
that political decisions, events or conditions will significantly affect the
profitability of a business actor or the expected value of a given economic action.
This can also be defined as the risk of financial market or personnel losses because
of political decisions or disruptions. Does your company do business on ground in
emerging markets, or is it selling to government customers in developing
economies. If it its doing either are you aware of how the political risk of those
markets can threaten your bottom line. These risks may include the following:

42

Risk of expropriation. Nathan holds that the expropriation risk is either direct or
indirect. Direct expropriation risk is the risk that the host government will (wholly
or partially) nationalize the asset or equity of Project Company in arbitrary manner
or without payment of just compensation. It also includes other forms of forceful
alienation of project assets at the instance of host government.viz forceful sale of
assets or production to an instrumentality of host government at below market
prices.
Indirect expropriation risk on the other hand, is a risk of major contract disputes
that affect the assets and ownership structure of a project company or a firm. This
includes the host governments (politically driven) debt default, failure to deliver
on a contract.
Risk of changes in regulatory regime. This means the risk of politically
motivated changes in regulatory policies or legal framework of the host
government which render the project unprofitable. Example may include import
and export restrictions, price controls, excessive taxation (like taxes on windy
gains, duplicate tax claims by both central and state government), stringent
environment laws or labor standards preferential policy towards protection of
domestic companies or financial institutions.
Currency risk, Weiss explains that there is a risk on inconvertibility of local
currency revenues into foreign currency required to pay off the debts owing to
foreign exchange shortages in host country. This currency risk becomes political
risk when the currency market is fixed or regulated by the host government or its
instrumentality. For example, there was a great risk of china allowing its currency
to depreciate in 2015 because of domestic economic slowdown and other
international factors.
43

Risk of imposition of capital controls. There is a risk of host government

adapting stringent currency or trade controls. Administrative delays in approving
capital transfers, excessive /severe limits on repatriation of profits (like by
imposition of onerous tax on conversion of currency), are examples of currency
controls, imposition of trade barriers, licensing requirements among others.
Restrictions of cross-border transfer of resources are examples of trade control.
Example, India allows free repatriation of profits once all the local and central tax
liabilities are met. Imposition of goods and services tax would decrease existing
onerous tax liabilities and thus, is expected to further liberalize the repatriation of
profits.
Risk of political upheaval, it includes political revolution, social movements,
protests, strikes, civil commotions, internal armed conflicts which may arise due to
social mobilization or change of public opinions aimed at thwarting corruption,
creating political imbalance or instability, removing existing power structures.
Political Risk Management.
From now on, we will proceed with the presumption that political risk is negative
that is to say unprofitable for the impugned business venture/investment.
According to recent research, many businesses in Canada and abroad dont do
nearly enough to reduce their exposure to political risk in emerging markets.
The key to protecting yourself is to have a clearly defined strategy for managing
your political risk, with a formally designated risk manager who will watch for
these hazards and find ways to deal with them. One of the most common strategies
is a four step process based on:
Identification, here through your risk manager, you gather pertinent
44

information about the types of political risk your company faces or is likely to
face in the target country. The objective here is to find out how political
conditions may affect your companys goals in the market.
Measure your exposure. Here you rank the risks identified and measure your
exposure to each other. This involves attaching numbers to the risk to reflect
their potential financial effects on your company. These measurements will
help determine the risk level of a market is within your tolerance thus helping
you decide whether to enter it.
Mitigation of risk. Here you take measures to lower the probability of a risk to
reduce its effects if it becomes a reality. How you do this will be determined by
the nature of the company, if youre making an investment for example you
could work with local partners whose familiarity with their market can help
you avoid problems. To help you if trouble hits, you could purchase insurance
against political risks.
Monitoring of the risks, once you have established how your risk
management process will work, there is need to set up routines for reporting,
evaluation and review. There should be formal channels for regularly reporting
political risk issues both upward to senior management and downward to
personnel. In this case you can turn to outside experts; there are numerous
private sector agencies that specialize in providing their clients with detailed
information on political risks in world markets and help companies establish
their political risk management systems.
The different ways in which political risk can be managed are as follows:
Avoiding investment.
The simplest way to manage political risk is to avoid investing in a country
ranked high on such risks. Where investment has already been made, plants
45

maybe wound up or transferred to some other country which is considered to

be relatively safe. This may be a poor choice as the opportunity to do business
will be lost.
Adaptation
Another way of managing political risk is adaptation .adaptation means
incorporating risk into business strategies.MNCs incorporate risk by means of
the three strategies: local equity and debt, development assistance and
insurance.
Threat
Political risk can also be managed by trying to prove to the host country that it
cannot do without the activities of the firm. This may be done by trying to
control raw materials, technology, and distribution channels in the host country.
The firm may threaten the host country that the supply of materials, products,
or technology would be stopped if its functioning is disrupted.
Diversification,
Undertaking a wide range of investments that is to say investment portfolio
diversification using political risk as a factor, non-committal of resources into
fixed and specific assets overseas, undertaking sub contracting, leasing and
sub-leasing, diversification of production catering to different markets,
reducing structural dependence on a single country, in relation to market for
raw material, increased flexibility to switch supplies through global operations
or international product markets including ability to recruit globally.
Decentralization of decision making.

46

This leads to freedom of sub-units in quickly making decisions to allow for

smooth liquidation of assets, withdrawal of investments, and exit from business
if the political risk seems to be materializing.
Avoiding long-term commitment of resources,
This includes labor, capital, physical assets through insertion of relevant
contractual clauses.
Implementation of intelligence system.
This helps to monitor recent social, political and environmental trends that may
reasonably impact business such monitoring allows enough opportunity to
respond to brewing political risk.
Political risk insurance.
As a final recourse, global companies can purchase insurance to cover their
political risk. With the political development in Iran and Nicaragua and the
assassinations of president park of Korea and president Sadat of Egypt all
taking place between 1979 and 1981, many companies began to change their
attitudes on risk insurance. Political risk insurance can offset for example ,as a
result of the UN security councils worldwide embargo on Iraq until it
withdrew from Kuwait, companies collected 100-200 million from private
insurers and billions from government owned insurers.
Measurement or Assessment of Political Risks.
Coping with the uncertainty in forecasting political risk incurs time and
research costs which get sunk if the process turns out to be futile for
insufficiency of predictability .A very specific set of political risk scenarios,
risk managers assess and quantify the potential impact of each scenario on the
business.
47

Discounted cash flow (DCF) analysis can be used for example to estimate the
financial impact of specific events as an input to help organizations understand
their tolerance level.
Other tools, such as an organizational network analysis can help determine the
estimated operational impact of specific risks. Here managers create a model of
the company as network of various inter-dependent business units. For example
a consumer goods company might have manufacturing, packaging and
distribution across countries. One of the most important aspects of
measurement is the translation projected events into readily identifiable and
comprehensible metrics, such as dollar figures, an impact index, or an ability to
influence index. Using these metrics, risk managers can assess whether the risk
level surpasses the organizations risk appetite or tolerance.
CREDIT RISK
This is the chance that a bond issuer will not make the coupon payments or
principal repayment to its bond holders. In other words, it is the chance the
issuer will default. A credit risk is a risk of default on a debt that may arise
from the borrower failing to make required payments. For example uchumi
supermarket which had some of its outlets in Uganda closed due to long
outstanding debts from different credit institutions. The loss may be complete
or partial.
How it works (example)
While the definition of credit risk may be straight forward, measuring it is not.
Many factors can influence an issuers credit risk and in varying degrees. Some
examples are poor or falling cash flow from operations (which is often needed
to make the interest and principal payments),rising interest rates(if the bonds
are floating rate notes, rising interest rates increase the required interest
48

payments), or changes in the nature of the market place that adversely affect
the issuer (such as a change in technology, an increase in competitors, or
regulatory changes).the credit risk associated with foreign bonds also includes
the home countrys socio- political situation and the stability and regulatory
practices of its government.
Why it matters:
Credit risk is one of the most fundamental types of risk. After all, it represents
the chance the investor will lose his or her investment. All bonds, except for
those issued by the U.S government carry some credit risk. This is one reason
corporate bonds almost always have higher coupon payment amounts than
government bonds.
A credit risk is the risk of default on a debt that may arise from a borrower
failing to make required payments. In the first resort, the risk is that of the
lender and includes lost principal and interest, disruption to cash flows and
increased collection costs. The loss maybe complete or partial. In an efficient
market .higher level of credit risk will be associated with higher borrowing
costs. Because of this, measures of borrowing costs such as yield spreads can
be used to infer credit risk levels based on assessments by market participants.
Losses can arise in a number of circumstances, for example:
i.

A consumer may fail to make a payment due on a mortgage loan, credit

card, line of credit, or other loan.

ii.

A company is unable to repay asset-secured fixed or floating charge debt.

iii.

A business or consumer does not pay an employees earned wages when

due.

iv.

A business doesnt pay an employees earned wages when due.

v.

A business or government bond issuer does not make a payment on a

49

coupon or principal payment when due.

vi.

An insolvent insurance company does not pay a policy obligation.

vii.

An insolvent bank wont return funds to a depositor.

viii.

A government grants bankruptcy protection to an insolvent consumer or

business.
To reduce the lenders credit risk, the lender may perform a credit check on
the prospective borrower, may require the borrower to take out appropriate
insurance, such as mortgage insurance, or seek security over some assets of
the borrower or a guarantee from a third party. The lender can also take out
insurance against the risk or on-sell the debt to another company. In
general, the higher the risk, the higher will be the interest rate that the
debtor will be asked to pay on the debt. Credit risk mainly arises when
borrower unable to pay due willingly or unwillingly.
Types of Credit Risk
A credit risk can be of the following types:
1. Credit default risk-the risk of loss arising from a debtor being unlikely
to pay its loan obligations in full or the debtor is more than 90 days past
due on any material credit obligation; default risk may impact all creditsensitive transactions, including loans, securities and derivatives.
2. Concentration risk- the risk associated with any single exposure or
group of exposures with the potential to produce large enough losses to
threaten a banks core operations. It may arise in the form of single
name concentration or industry concentration.
3. Country risk- the risk of loss arising from a sovereign state freezing
foreign currency payments(transfer/conversion risk) or when it defaults
50

on its obligations(sovereign risk); this type of risk is prominently

associated with the companys macro economics performance and its
political stability.
Mitigating Credit Risk
Landers mitigate credit risk in a number of ways, including:
a) Risk-based pricing-lenders may charge a higher interest rate to
borrowers who are more likely to default, a practice called riskbased pricing. Lenders consider factors relating to the loan such as
loan purpose, credit rating and loan-to-value ratio and estimate the
effect on yield (credit spread).
b) Tightening-lenders can reduce credit risk by reducing the amount
of credit extended, either in total or to certain borrowers. For
example, a distributor selling its products to a troubled retailer may
attempt to lessen credit risk by reducing payment terms from net 30
to net 15.
c) Deposit insurance-Governments may establish deposit insurance to
guarantee bank deposits in the event of insolvency and to encourage
consumers to hold their savings in the banking system instead of in
cash.
d) Diversification Lenders to a small number of borrowers (or kinds
of borrower) face a high degree of unsystematic credit, called
concentration risk. Lenders reduce this risk by diversifying the
borrower pool.
e) Covenants-Lenders may write stipulations on the borrower, called
covenants into loan agreements, such as:i.

Periodically report its financial condition

51

ii.

Refrain from paying dividends, repurchasing shares, borrowing

further, or other specific, voluntary actions that negatively affect
the companys financial position, and

iii.

Repay the loan in full, at the lenders, in certain events such as

changes in the borrowers debt-to-equity ratio or interest
coverage ratio.

f) Credit insurance and credit derivatives-lenders and bond holders

may hedge their credit risk by purchasing credit insurance or credit
derivatives. These contracts transfer the risk the risk from the lender
to the seller (insurer) in exchange for payment. The most common
credit risk derivative is the credit default swap.
FOREIGN EXCHANGE RISK
Also called FX risk, currency risk, or exchange rate risk-is the financial risk of an
investments value changing due to the changes in currency exchange rates. This
also refers to the risk an investor faces when he needs to close out a long or short
position in a foreign currency due to an adverse movement in exchange rates.
How it works (example):
Foreign exchange risk is similar to currency risk and exchange rate risk.
Foreign exchange risk is the risk that an asset or investment denominated in a
foreign currency will lose value as a result of unfavorable exchange rate
fluctuations between the investments foreign currency and the investment holders
domestic currency.
Holders of foreign bonds face foreign-exchange risk, because those types of bonds
make interest and principal payments in a foreign currency. For example, lets
assume XYZ Company is a Canadian company and pays interest and principal on a
52

$1,000 bond with a 10% coupon rate in Canadian dollars (CAD). If the exchange
rate at the time is $1 CAD: $USD, then the 10%coupon payment is equal to $100
Canadian and because of the exchange rate, it is also equal to US$100.
Now lets assume a year from now the exchange rate is 1:0.85. Now the bonds
10% coupon payment, which is still $100 Canadian, is worthy only US$85.
Despite the issuers ability to pay, the investor has lost a portion of his return
because of the fluctuation of the exchange rate.
Why it matters:
Foreign exchange risk is an additional dimension of risk which offshore investors
must accept. As a result, open positions in non-dollar denominated items may
need to be closed. Though foreign-exchange risk specifically addresses undesirable
movements that might result in losses, it is possible to benefit from favorable
fluctuations with the potential for additional value above and beyond that of an
already-stable investment.
BREAKING DOWN foreign exchange risk
Foreign exchange risk typically affects businesses that export and /or import their
products, services and supplies. It also affects investors making international
investments. For example, if money must be converted tom another currency to
make a certain investment, then any changes in the currency exchange rate will
cause that investments value to either decrease or increase when the investment is
sold and converted back into original currency.
Types of Exposure
1. Transaction exposure

53

A firm is exposed to foreign exchange risks if it has receivables and payables

whose values are directly affected by currency exchange rates. Contracts
between two different firms with different domestic currencies set contracts
with specific rules. This contract provides exact prices for services and exact
delivery dates. However, this contract faces the risk of exchange rates between
the involved currencies changing before the services are delivered or before the
transaction is settled.
2. Economic exposure
A firm faces foreign exchange risks due to economic exposure-also referred to
as forecast risk, if its market value is impacted by unexpected currency rate
volatility. Currency rate fluctuations may affect the companys position
compared to its competitors, its value and its future cash flow. These currency
rate changes may also have good effects on firms. For example, a company
from the United States with a milk supplier from New Zealand will be able to
cut costs if the U.S dollar strengthens against the New Zealand dollar. In this
light, economic exposure may be managed strategically through outsourcing.
3. Translation exposure
All firms generally prepare financial statements. These statements are created
for reporting purposes. They are provided for multinational partners, thus the
need for the translation of important figures from the domestic currency to
another currency. These translations face foreign exchange risks, as there can
be changes in foreign exchange rates when the translation from the domestic
currency to another currency is performed. Though translation exposure may
not impact a firms cash flow, it cannot impact a films cash flow, it can change
the overall reported earnings of the firm, which affects its stock price.

54

4. Contingent exposure
A firm has contingent exposure when bidding for foreign projects or
negotiating other contracts or foreign direct investments. Such an exposure
arises from the potential for a firm to suddenly face a transactional or economic
foreign exchange risk, for a project bid to be accepted by a foreign business or
government that if accepted would result in an immediate receivable. While
waiting, the firm faces a contingent exposure from uncertainty as to whether or
not that receivable is paid the firm then faces a transaction exposure, so a firm
may prefer to manage contingent exposures.
Sources of Foreign Exchange Risk
Foreign exchange risk for a business can arise from a number of sources,
including:
Where the business imports or exports.
Where other costs, such as capital expenditure are denominated in foreign
currency.
Where revenue from exports is received in foreign currency
Where other income, such as royalties, interest, dividends is received in foreign
currency.
Where the businesss loans are denominated (and therefore payable) in foreign
currency.
INTEREST RATE RISK
Interest rate risk is a chance that an unexpected change in interest rates will
negatively affect the value of an investment. For example lets assume you
purchased a bond from company X, because bond prices typically fall when
interest rates rise, unexpected increase in interest rate means that your investment
55

could suddenly lose value. If you expected to sell bond before maturity, this could
mean you end up selling the bond for less than you paid for it is a capital loss.

FOREIGN INVESTMENT ANALYSIS

Introduction:
Foreign investment analysis. Is the process of evaluating an investment for
profitability and risk ultimately has the purpose of measuring how the given
investment is a good fit for a portfolio.
Foreign investment. It involves capital flows from one country to another,
granting extensive ownership stakes in domestic companies and assets. Foreign
investment denotes that foreigners have an active role in management as a part
of their investment.
Importance of foreign investment
i.

Economic development stimulation.

Foreign investment can stimulate the

target

countrys

economic

development, creating more conclusive environment for you as the

ii.

investor and benefits for the local industry.

Increased productivity.
The facilitates and equipment provided by foreign investors can increases

iii.

a work forces productivity in the target country.

Increment in income.
Foreign investment can increase the forget countrys income with more
jobs and higher wages, the national income normally increase as a result
of economic growth. Take note that larger corporations would usually

56

offer higher salary level than what you would normally find in the target
iv.

country which can lead to increment in income.

Reduced despairing between revenues and costs.
Foreign investment can reduce the disparity between revenues and costs
with such countries will able to make sure that production cost will be

v.

the same and can be sold easily.

Resource transfer.
Foreign investment will allow resource transfer and other exchange of
knowledge, where various countries are given access to new technologies
and skills. For example transferring resources is giving away cash to
another person. These resources include stocks, bonds, cash, property

vi.

and vehicles etc.

Development of human capital resources.
Foreign investment is the development of human capital resources,
which is also often understand as it is not immediately apparent. Human
capital is the competence and knowledge of those able to perform labor.
The attributes gained by training and sharing experience would increase

vii.

the education and the overall human capital of the country.

Employment and economic growth.
Foreign investment creates new jobs as investors in the target country,
creates new opportunities. This leads to an increase in income and more
buying power to the people which in turn leads to an economic growth.

Disadvantages of foreign investment.

i.

Risk from political changes.

Political risk is the risk investment return could suffer as a result of
political changes in government, legislative bodies and other foreign
policy makers. For example political decisions by the governmental
leaders about taxes, currency valuation, trade tariff, investment, wage
levels can affect the business conditions and profitability. Because
57

political issues in other countries can instantly changes foreign

ii.

investment is very risky.

Negative influence on exchange rate.
Foreign investment can occasionally affect exchange rate to the
advantage of one country and the problem of another. For example
interest rates, changes in interest rate affect currency value and dollar
exchange rate. Increase in interest rates cause a countrys currency to
appreciate because higher interest rate provide higher rates to lenders
thereby attracting more foreign capital which causes a rise in exchange

iii.

rate.
Economic non viability.
Considering that foreign investment may be capital intensive from the
point of the view of the investor. It can sometimes be very risky or

iv.

economically non-viable.
Negative impact on countrys investment.
The rules that govern foreign exchange rate and investment might
negatively have an impact on the investing country. Investment may be
banned in some foreign markets which means that is impossible to

v.

pursue an inviting opportunities.

Expropriation.
Expropriation is act of the government in taking privately owned property
to be used for the purposes designed to benefit the overall public. For
example in many countries where government needs to build a new road
and railway it expropriates the affected terrain from their owners. It
usually compensa4tes them adequately at least in developed countries. If
an owner does not agree on the offered price, she can seek for better
compensation.
Remember that political changes can also lead to expropriation which is
scenario where the government will have control over your property and
assets.
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Electronic commerce (E-COMMERCE)

Is the buying and selling of goods and services or the transmitting of funds or
data over an electronic networking primarily the internet.
These business transactions occur either or business to business or business
to customers. Customer to customer or customer to business.
It also refers to wide range of online business activities for products and
services.
Advantages of E-Commerce.
E- Commerce advantages can be broadly classified in three major categories.
i.

Using E commerce organization can expand their market to nationals

and

international

markets

with

minimum

capital

investment.

Anorganization can easily locate more customers best suppliers and

ii.

suitable business partner across the globe.

It helps organizations to provide better customer services since the

iii.

website normally give details of the products or service offered.

E-Commerce increase productivity of the organization.
This is because it supports the pull type management where business
process starts when a request comes from a customer and it works like
just in time.

iv.

It reduces paperwork a lot and hence the storage of paper files is kept

v.
vi.

minimal in the organization.

It helps to simplify business process and make them faster and efficiency
It helps the organization to reduce the cost to create process distribute
retrieve and manage paper based information by digitalizing the
information.
59

vii.

It works 24/7, customers can do transaction for the product at any time
anywhere from any location the 24 refers to the hours a day and 7 the

viii.

days in week.
E-commerce applications provide the user more option to compare and

ix.

select the cheapest and better options.

A customer can put review comments about a product can see what
others are buying or see review comments of other customers before

x.
xi.

making a final decision as to whether or not to buy.

Reading available information.
A customer can see the relevant detailed information within seconds

xii.

rather than waiting for days or weeks.

E-Commerce increases competition among the organization and as result

xiii.

organizational substantial discount to customers.

Customer need not to travel to shop a product thus less traffic on the

xiv.

road and low air pollution.

E-commerce helps in reducing cost of product for the poor people to

xv.

afford the products.

Helps government to deliver public service like heath care service, social
service at a reduced cost and improved way since they are able to get a

xvi.

cheap supplier over the internet.

It has enabled access to product in rural areas as well which are
otherwise not available to them.

Disadvantages of electronic commerce

i.

Many firms have had trouble recruiting and retaining employees with the
technological design and business process skills needed to create an

ii.

effective electronic commerce presence.

Many business face cultural and legal obstacles to considering electronic
commerce.

60

iii.

Difficulty of integrating existing databases and transactions processing

software designed and traditional commerce into the software that

iv.

enables electronic com

Lack of security.
One of the main roadblocks to the wide acceptance of the e-commerce by
business and customer alike is the perceived lack of adequate security

v.

for online transactions.

Hidden costs.
Although buying online is convenient the cost of this convenience is not
always clear at the front and e.g. lack of warranty courage, unacceptable
delivery and restocking forces.
Globalization.
Is the process in which people, ideals and goods spread throughout the
world,more

interaction

and

integration

between

the

worlds

cultures,government and economics.

It can also refers to the interaction of one economy with all the other
economies of the world.Thisinteraction can be in in terms of financial
transactions,trade,politics,education,production.
Advantages of globalization
i.

Increase in employment opportunities.

As globalization increases, more and more companies are setting up
businesses in other countries.This in turn increases the employment
opportunities.People can get better jobs without having to move to other

ii.

countries in search of better jobs.

Increase in free trade.

61

An increase in free trade has opened doors for investors in developed

countries to invest their money in developing country.Big companies from
iii.

developed countries have the freedom to operate in developing countries.

Faster flow of information.
Information flows from one part of the world to the other
immediately,resulting in the world being tied together.Information can be
shared between individuals and corporations at avery fast rate.

iv.

Increase in quality of goods and services.

As a result of globalization people have access to the best quality of goods
and services throughout the world.Companies have to strive to produce

v.

better quality goods and services to the customer.

Decrease in prices of goods and services.
As the competition in the market has increased due to rapid
globalization, producers have to price their products competitively in

vi.

order to remain in the market.

Reduction in cultural barriers
As people move from one country to another barriers between various
cultures tend to decrease.
Education.
With the increase in globalization, it has become easier for people to
move across borders to different parts of the world to acquire better
education. This has resulted in an integration of cultures.

Disadvantages of globalization.
i.

ii.

Environmental degradation.
Developed countries can take advantages of underdeveloped countries,
weak regulator laws in terms of environment protection.
Unfair working conditions.

62

Many multinationals have been occurred of social injustice by exploiting

labor in under developed countries in order to cut costs. Labor are
iii.

provided unhealthy working conditions leading to health hazards.

Fall in employment growth rate.
Though the promotion of the idea that the advances in technology and
increase in productivity would create more jobs has been a cornerstone

iv.

of globalization.
Growing disparity among rich and the poor.
86% of the worlds resources are said to be consumed by the richest 2%
of the worlds population. This means that the poorer 80% only gets to
consume 14% of the worlds resources. This is a direct result of

v.

globalization.
Rapid spread of deadly diseases.
Deadly diseases such as AIDS or other communicable diseases can
spread at very fast pace via travelers or due to other means as direct

vi.

consequence of globalization.
Small industries face extinction.
Small industries which are indigenous to a particular place face
extinction as they do not have the resources or the power that the
multinational companies have.As a result small industries are unable to
compete with bigger companies and go out of the business.

Electronic finance
is the provision of financial services and markets using electronic
communication and computation.
Advantages of electronic finance.
i.

Cost effective.
The entire financial transactions will eventually become electronic,so
sooner conversion is going to be lower on cost.
63

ii.

Higher margin.
Electronic finance also enables us to move better with high margin for
more business safety. Higher margin also means business with more

iii.

control as well as flexibility. You can also save time.

Better productivity.
Productivity here means productivity for both companies and customers.
People like to find answers online because it is faster and cheaper and it

iv.

costs a lot cheaper expense as will for the company.

Economy benefit.
It allows us to make transaction without any needs on stores,
infrastructure investment and other common things we find. Companies
only need well-built website and customer service.

Disadvantages of electronic finance.

i.

Security.
Customers need to be confident and trust the provider of payment
method. Sometimes we can be tricked. Examine on integrity and

ii.

reputation of the web stores before you decide to buy.

Scalability system.
A company definitely need a well-developed website to support numbers

iii.

of customers at a time if your web is not well enough, you better forget it.
Integrity ondata and system.
Customers need secure access all the time in addition to it,protection to
data is also essential.Unless the transaction can provide it,we should

iv.

refuse for electronic finance.

Customer service and relation problem.
They sometimes forget how essential to build loyal relationship with
customers,without loyalty from customers,they will not survive the

v.

business.
Products people.
64

People who prefer and focus on product will not buy online.They will
want to feel,try and sit on their new couch and bed.
Financial engineering
Is the use of mathematical techniques to solve financial problems.
Financial

engineers

design,create,

implement

new

financial

instrument,models and processes to solve problems in finance and take

advantage of new financial opportunities.Financial engineers uses tools
and knowledge from the field of computer science,statistics,economics
and applied mathematics to address current financial issues
Advantage of financial engineering.
i.

Currency and commodity fluctuations.

Financial engineering can reduce risk,if you operate accompany that
does business in another company that does business in another

ii.

countries sells commodities or commodity based products and services.

Compensation.
Financial engineering allows you to offer equity-like compensation to

iii.

attract or keep executives and key employees.

Agreements and ventures.
Ventures is a business arrangement in which two or more parties agree
to pool their resources for the purposes of accomplishing a specific task.
Your company can use financial engineering products and strategies to
provide contingent payments tied to contractual provisions.

65

66