Bao cao thuc tap detemine the financial risks and commercial risks which coma-imex, an import-export enterprise now facing with and what feasible solutions coma-imex should take to solve them

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Trầần Minh Phương – CQ503768 – Business English 50A TABLE OF CONTENTS TABLE OF ABBREVIATIONS............................................................................ TABLE OF FIGURES .......................................................................................... EXECUTIVE SUMMARY.................................................................................. INTRODUCTION.................................................................................................. 1. Introduction of the research topic........................................................... 2. Purpose and scope of the research........................................................... 3. Research questions.................................................................................... 4. Methodology.............................................................................................. CHAPTER 1: INTRODUCTION......................................................................... 1.1 An overview of COMA-IMEX................................................................. 1.1.1 History and development of COMA-IMEX................................................ 1.1.2 Functions and missions............................................................................... 1.1.3 Organizational structure.............................................................................. 1.2. Overview of risk management in international payment at COMA-IMEX........................................................................................... 1.2.1 International payment reality in recent years............................................. 1.2.2 Reality of risks at COMA-IMEX................................................................ CHAPTER 2: THEORETICAL FRAMEWORK............................................... 2.1 Key terms and definitions........................................................................ 2.1.1 International payment................................................................................. 2.1.2 Risks........................................................................................................... 2.1.3 Risks in international payment.................................................................... 2.2 Commercial risks...................................................................................... 2.2.1. Risks to sellers.......................................................................................... 2.2.2. Risks to buyers.......................................................................................... 2.3. Risks in payment (financial risks)......................................................... 2.3.1. Credit risk................................................................................................. 2.3.2 Country risk.............................................................................................. 2.3.3. Legislative risk.......................................................................................... Trầần Minh Phương – CQ503768 – Business English 50A 2.3.4. Foreign exchange risk............................................................................... 2.3.5 Interest rate risk........................................................................................ 2.3.6 Risk of selecting unsuitable conditions while negotiating international payment terms........................................................................................... CHAPTER 3: FINDINGS AND ANALYSIS..................................................... 3.1 Business results in recent years.............................................................. 3.1.1. Reality of financial general status and business operation at COMAIMEX........................................................................................................ 3.1.2. Overall assessment of COMA-IMEX’s real situation of international payment.................................................................................................... 3.2. Reality of risk management at COMA-IMEX...................................... 3.2.1. Types of risks which COMA-IMEX often faced with.............................. 3.2.2. Preventive solutions to risks which have been used so far at COMAIMEX........................................................................................................ 3.3. Overall assessment of risk management in international payments .................................................................................................................. 3.3.1. Achievements........................................................................................... 3.3.2. Failures..................................................................................................... CHAPTER 4: RECOMMENDATION............................................................... 4.1. Suitable methods of payment................................................................. 4.2. Suitable currency in payment................................................................ 4.3. Payment methods diversification........................................................... 4.4. Choosing partners................................................................................... 4.5. Human resources.................................................................................... 4.6. Relationship with banks......................................................................... 4.7. Selecting and negotiating import/export contract conditions.............. 4.8. Strengthening COMA-IMEX’s business and position......................... 4.9. Others...................................................................................................... CONCLUSION..................................................................................................... REFERENCES Trầần Minh Phương – CQ503768 – Business English 50A TABLE OF ABBREVIATIONS COMA-IMEX Construction Machinery Corporation – Import Export Centre L/C Letter of Credit Incoterms International Commercial terms UCP The Uniform Customs and Practice for documentary credits WTO World Trade Oganization ISBP International Standard Banking Practice E/R Earning/Revenue T/T Telegraphic Transfer D/P Documents against payment D/A Documents against acceptance CIF Cost & Insurance & Freight i Trầần Minh Phương – CQ503768 – Business English 50A TABLE OF FIGURES Table 1 – Business statistics at COMA-IMEX from 2009-2011.........................19 Chart 2 - Main sources of revenue at COMA IMEX (2009-2011).....................21 Table 2 – Prime cost in USD and JPY (2009-2010)............................................22 Table 3 – E/R percentage of COMA-IMEX from 2009-2011.............................22 Chart 3 - Percentage of Sales from import/export..............................................23 ii Trầần Minh Phương – CQ503768 – Business English 50A EXECUTIVE SUMMARY International payment nowadays is very important yet risky. Risk management is issue which managers pay much attention to, especially managers of import-export firms. The purpose of this study is to detemine the financial risks and commercial risks which COMA-IMEX, an import-export enterprise now facing with and what feasible solutions COMA-IMEX should take to solve them. The report is divided into four chapters. In chapter 1, the researchers give a brief presentation on the establishment and development of Construction Machinery Import Export Center (COMA-IMEX) and introduction about their functions, missions and the company’s structure. In additions, there are overview of risk management at COMA-IMEX in recent years. In chapter 2, the researchers present theoretical framework which is supported to the report. This chapter covers key terms and definitions of risk management, types and classification of risks, etc. Then, in chapter 3, by doing research of financial status and business statement of COMA-IMEX, the researchers gives comments on reality of import/export business at COMA-IMEX as well as COMA-IMEX’s achievement and failures. Finally, in chapter 4, the researchers makes some recommendations to strengthen risk management at COMA-IMEX iii Trầần Minh Phương – CQ503768 – Business English 50A INTRODUCTION 1. Introduction of the research topic In the speedy-growing economic world nowadays, it is essential that every country integrates in order to narrow the rich-poor gap between developed and developing countries. Pacific Asia, in the recent years, has been the most dynamic part of the economic world. Being a nation in this area, Vietnam is not out of the trend. One of the most important long-term strategies of Vietnam after joining WTO is import-export promotion. Through import-export business, Vietnam will be able to bring the world domestic goods, to gain foreign currencies, as well as to create more jobs, and to decrease the unemployment rate, etc. It is undeniable that doing import-export helps Vietnam speed up the economics improvement. In the course of conducting import and export business, payment transaction plays an extremely important role: it is essential for running the contract smoothly. The payment transaction holds direct influences on capital turnover, reproducing process, investment and profits of the company. However, there are many difficulties and complex problems which happen during the payment transaction, such as policy risk, exchange risk, credit risk, interest rate risk, etc. These problems can only be predicted and solved with professional experiences and good technical skills. In particular, prevention of financial risks in business activities in general and in international payment is an important task for all enterprises, including COMA-IMEX. Therefore, “How to prevent financial risks in international payment transaction?” has become a question for managers. That is the reason why I am doing my research: “Risk management in the international payment at COMAIMEX”. 2. Purpose and scope of the research The research has been carried out during my internship with helps from managers of COMA-IMEX and under the instruction of Mrs. Nguyen Thi Thanh Van. Due to the limit scope, the report mainly aims at:  Analyzing general business as well as import/export business of COMA-IMEX from 2009-2011  Researching and analyzing risk management methods that COMAIMEX has been used so far  Suggesting some solution to improve efficiency of risk management at COMA-IMEX 1 Trầần Minh Phương – CQ503768 – Business English 50A 3. Research questions There are 2 questions which the research deals with: 1. What is the reality of risk management in international payment at COMA-IMEX in recent years? 2. How can COMA-IMEX improve the risk management in international payment? 4. Methodology The research has been carried out using data from financial reports of COMA-IMEX from 2009 to 2011, course books about international payment, international trade and risk management from well-known scholars. Observations as well as interviews are important method which researchers use to work on the report. 2 Trầần Minh Phương – CQ503768 – Business English 50A CHAPTER 1 INTRODUCTION 1.1 An overview of COMA-IMEX 1.1.1 History and development of COMA-IMEX COMA-IMEX is one of 29 members of Construction Machinery Corporation that specializes in machinery trading, established by Decision no.1027/QDBXD dated 07.26.2000 from the Minister of Construction. The Construction Machinery Corporation is a state owned enterprise established in accordance with the Decision No.993/BXD-TCLD dated November 20th 1995 issued by the Minister of Ministry of Construction, basing on the former Union of Construction Machinery Enterprise founded in 1975. The international name of the center is IMPORT EXPORT CENTRE, abbreviated as COMA-IMEX. The centre has been registered with certification of business registration no 313597 from Hanoi Planning Committee on Sep 5th 2000. Currently, COMA-IMEX is located at 13th floor, COMA building, Lane Hoa Binh 6, 125D Minh Khai, Hai Ba Trung district, Hanoi. 1.1.2 Functions and missions 1.1.2.a. COMA-IMEX’s functions - Organize activities of sending Vietnamese experts and worker to work short term oversea with permission from Ministry of Construction - Import goods such as: machines, raw materials… as the market demands - Activities involves financial leasing 1.1.2.b. COMA-IMEX’s missions - Organize short-term courses to improve management skills as well as technical skills and foreign languages for employers - Negotiate and perform business contracts on foreign trade and other economic contracts - Labour export 3 Trầần Minh Phương – CQ503768 – Business English 50A 1.1.3 Organizational structure There is a simple structure inside COMA-IMEX with 29 personnel in total 1 General Director, 2 Deputy Directors, functional departments with a manager and a deputy manager of each department… as described below: Chart 1 – Organizational Structure of COMA-IMEX  The Board of Director including General Director and two Deputy Directors are responsible for controlling and commanding all business activities of COMA-IMEX.  Accounting Department is responsible for staff salary payment and other accounting activities; administrative business, receptions, monitoring and maintaining working facilities... are also included in their responsibilities.  Import/Export Sales Department advises and helps Director on import/export business; does other works that involves import/export as required by Director  Labour Export Department advises and helps Director on labour exporting by contracts  Training Department is responsible for training and organizing courses to provide employees with skills and knowledge before sending them abroad. All other training-involved works are their responsibilities 4 Trầần Minh Phương – CQ503768 – Business English 50A  Labour Management Department assists Director in managing labours working short term aboard, deals with other issues involving exported employees’ benefits and disputes during and after their working durations  All departments and employees are expected to do other works as General Director requires 1.2. Overview of risk management in international payment at COMAIMEX 1.2.1 International payment reality in recent years In recent years, the main goods to export at COMA-IMEX are small metallic details such as keys, door-hinges while main goods to import are heavy construction machineries of all kind. Importing machinery is also main source of revenue at COMA-IMEX in latest years, due to the high price of these kinds of goods (a contract to import one unit of construction machinery may reach the number of US100,100 in basis value, when COMA-IMEX sell the imported machine, profit may be in range of 5% to 10% of the contract) In 2009, revenue from sales of imported goods is 21,612,278,060VND while revenue from exporting is only 2,369,702,668VND, which takes only 9.88% of the total revenue (23,981,980,728VND). Revenue from importing is 10 times more than exporting, which means in 2009, importing is COMA-IMEX’s key business. In 2010 and 2011, importing is still COMA-IMEX’s key revenue, but the difference between import and export has been narrowed. In 2010, revenue from importing is down to 15,791,573,880VND (71.73% of total revenue) but export activities brought COMA-IMEX 6,222,191,144VND (28.27%) which means nearly as half as revenue from importing goods. Last year (2011), both revenue from import and export increased rapidly which led the total revenue jumped up as twice as in 2010. Export revenue in 2011 is about one third of revenue from importing. From the numbers above, researchers point out that COMA-IMEX’s financial condition is quite healthy, main business – importing – brings COMA growing and stable revenue. However, COMA-IMEX is gradually improving its field of exporting, the unbalance between import and export is less and less, which have been proved in the year of 2010. In 2010, revenue from importing decrease sharply, if it was not for increasing revenue of export then COMA-IMEX cannot reached that high total revenue 5 Trầần Minh Phương – CQ503768 – Business English 50A 1.2.2 Reality of risks at COMA-IMEX 1.2.2.a Some cases of risks which COMA-IMEX often faced On Apr 4th 2009, COMA-IMEX signed a contract no 68/COMA/FOSHAN with trade company Foshan to import 5.000m2 of Double Low E tempered glass CIF at Haiphong port worth 845,000.00USD. This contract was to serve the project of Indoor Game Hall to celebrate 1000 years anniversary of Thang Long - Hanoi. Delivery time was within 120 days from the date of opening L/C. On June 18th 2009, the Ministry of Construction declared Circular No. 11/2009/TT-BXD on "Regulation of the management quality of products, goods and construction glass." Among the content of regulations and circulars pointed out that: "The importer must provide the customs authorities at the border gate all the certificate of: + Assessing the control system of quality from manufacturer in accordance with ISO 9001: 2008; + Assessing the quality of product samples, glass at the border gate building must be in accordance with the quality standards setting out in this Circular;" Indeed, circulars issued by the Ministry of Construction aims to build technical barriers to trade (TBT). Like in other countries, there are three specific purposes on this circular: to help protect production, protect consumers and preserve the ecological environment in the country, and deal with the barriers of the other countries in international trade which are more and more modern and sophisticated (such as case of Thailand: Thailand launched the hygiene standards of food safety, regulation and registration of labeling foods for processed foods which are very complex and caused foreign exporters a lot of time and cost; another example is China where there are many strict regulations on hygiene and health at the border and ports which create many difficulties to seafood exports). However, the contract had signed before Circular No.11 /2009/TT-BXD promulgated so COMA-IMEX not able to respond in time the seller's ship came to port. In additions, FOSHAN is just a commercial company who is unable to define whether their products meet the requirement as in ISO 9001:2008 or not. In the situation above, not only country risk that COMA-IMEX faced with but also other commercial risk arises such as: delay in unloading goods, more expenses for storage fee, goods are unable to import so COMA-IMEX was unable to deliver goods in time to provide the project of Indoor Game Hall. 6 Trầần Minh Phương – CQ503768 – Business English 50A 1.2.2.b Preventive solutions to risks which COMA-IMEX has used so far Using the stable and strong currencies in international payment and using forward contracts, futures contracts are some of preventive solutions to exchange rate risk which COMA-IMEX often used. In order to prevent commercial risks, COMA-IMEX often in preference to trade with familiar, prestigious customers and partners than new ones. During negotiation about contract’s terms, COMA-IMEX always point out that the delivery time is as soon as possible, it is often more than 3 months since the contract is signed. Nowadays, due to Government’s policy of foreign currency, getting foreign currencies to use in import/export business is a big problem to import/export enterprises like COMA-IMEX. To have stable sources of currencies, COMA-IMEX has to buy from outside markets and re-sell to banks, or makes some agreement with banks so that they can provide the company with USD or JPY in time. 7 Trầần Minh Phương – CQ503768 – Business English 50A CHAPTER 2 THEORETICAL FRAMEWORK 2.1 Key terms and definitions 2.1.1 International payment As described in encyclopedia from thefreedictionary.com (a prestigious academic website), below is how international payment understood: Payment made between countries, whether in settlement of a trade debt, as a unilateral transfer of funds, for capital investment, or for some other purpose. The reasons for such payments and the methods of making them and accounting for them are matters of concern to economists and national governments. International debts are settled either from accumulated balances of foreign currency or claims on foreign currency, or by loans from creditor to debtor, or by drawing on the International Monetary Fund, or by movements of gold. How a country balances its international accounts is one of the most important decisions for its balance of payments. According to Dr. Nguyen Van Tien (2011), Head of International Department, Banking Academy, international payment is implementation of doing payments and rights of monetary benefits which occurs through relationships of concerned banks, due to economic and non-economic activities, between organizations and foreign organizations, or individuals and foreign individuals, or between a country and an international organization. 2.1.2 Risks Risk is threat of danger, damage, injury… which can be raised during many kind of actions in real life … In business life, breakdowns and accidents happen out of a sudden may cause serious troubles and great loss of human or property. All of those unexpected incidents are called risks. When talking about risks, it is often about loss of physical assets caused by external or internal vulnerabilities. There are some preventive methods to deal with risks: Avoid risks: which means do nothing risky or uncertain. This method cannot be used in business because avoiding risks equal to gaining nothing, no profit and being rejected in competition. Since “high risk, high profit”, risks cannot be swept out totally in doing business. Prevent and reduce risks: by using preventive methods to minimize risks such as fire alarm systems, labour safety… and studying rules and regulations in economy, a company or manager will be able to reduce risks even though risks are not disappear completely. 8 Trầần Minh Phương – CQ503768 – Business English 50A Standby funds: spend a fixed amount of money to create a fund to use in case risks happen. Pros: companies will be self-prepared. Cons: it is difficult to raise enough money for the funds if a great risk happens; moreover, standby funds may leads to dead capital Risks transfer: organizations or individuals hire professional insurance companies to be responsible for their risks 2.1.3 Risks in international payment During the process of international payment, or in the process of import/export business, there are many chances that risks will happen. There are more than one ways to classify risks in international payment as well as ways to define and evaluate them. They can be classified by causes or by involved parties (when different methods of international payment are considered). In Multinational Business Finance 10th Edition, risks are divided by range of influences: (David K. Eiteman, Arthur I. Stonehill and Michael H. Moffett, 2003) In my report, risks will be divided by causes of risks into the two main types of risks that import/export firms in Vietnam often faced with: Commercial Risk and Risk in Payment (Financial risk) 2.2 Commercial risks Definition of Commercial risk: “The risk that a debtor will be unable to pay its debts because of business events, such as bankruptcy” (Campbell R. Harvey, 2011). This type of risk shows in every business deal, even domestic business. 9 Trầần Minh Phương – CQ503768 – Business English 50A Commercial risks in international payment are similar to risks occurs in domestic business but more complicated and higher risky. It can be considered differently from different sides of seller and buyers. In the lecture of “Risk management”, Võ Hữu Khánh, MA. (2011) pointed out and classified commercial risks very clearly as below: 2.2.1. Risks to sellers  Mistakes in payment  Buyer’s poor finance or inability of paying Buyers’ inability to pay within the agreed time, when their funds run out of money, they may ask for extension of repayment. The payment may be compromised if the buyer can not improve their financial situation immediately. The legislation: in cases that the buyers can no longer claim payment, that enterprise shall be dissolved by law. Exporter's debts are paid only after priority debts are settled such as debts of wages, debts of social organization, unpaid taxes... There is very little chance for exporter to recover their money that buyer owed them, even very small amounts. Facing with the loss of the buyer's payment ability, there are few solutions unless sellers do effective measures of safety on payment before making commercial contracts, or buy insurance from companies who responsible for this problem. 2.2.2. Risks to buyers 2.2.2.1. There are risks to buyer when violations of contract happen such as: a. Delay in shipment which affects business Any delay caused by internal or external reasons such as delays in shipment caused by natural disasters or accidents, or changes in shipment or payment terms, changes in transportations…will affect business badly b. Changes of payment terms Lead to changes in plans and create difficulties (particularly in case buyers pay with loans from banks). Sometimes, sellers unilaterally change the terms of payment and force buyers to pay once for all before shipping. 10 Trầần Minh Phương – CQ503768 – Business English 50A c. Partial shipment If not in special cases, partial shipment should not be allowed because the drawback to this kind of shipment is its expense. The cost for transporting a great amount of goods always be more economic than several smaller packages d. Changes in prices Higher prices compared to original prices in contract will lead to contract cancel or the buyers have to suffer a loss from the higher price. In this case the buyers may refuse to continue the contract and find another supplier but this solution still makes delivery behindhand. e. Risks in insurance Lack of controlling may lead to serious breakdowns in shipment, in that case, even the money that insurance company pay to make up for goods has reached the highest level, it is still too low compared to real value of goods f. Quality of goods: Any difference in quality of good compared to what has been signed in documents will be considered inappropriate, which causes troubles to buyers in relationships between the buyers and involved parties (such as authorities, customs, customers…) g. Origin of goods Certificate of Origin is unchangeable, which means the origin of goods cannot be differ from one that signed in the contract. h. Unhygienic state of goods: In case the performance testing for safety and hygiene of goods does not meet the medical requirement as in seller’s certificate, those goods cannot be imported i. Stocking costs When the bill of lading arrives after goods did, the buyers cannot get the delivery without documents and have to pay amount of storage fee j. Quantity of goods When the buyers receive less than what they demanded in contract, obviously the lost goods cause them troubles for not gaining profit or slowing down project progress. In addition, buyers still bear loan interest from bank. 11 Trầần Minh Phương – CQ503768 – Business English 50A If the buyers import goods in order to sell to a third party, the contract between buyers and third party may be cancelled and buyers’ reputation will be damaged If the received quantity is bigger than one in contract, buyers have to pay more taxes and sometimes get trouble by being accused of tax evasion 2.2.2.2. Reasons for commercial risks a. Lack of information Because of geographic distance between sellers and buyers, parties lack of information about each other and cannot be sure about the ability of payment or progress of contract performance b. Lack of knowledge Trade laws are differ from country to country, all trade laws and UCP, Incoterms, ISBP… should be understood well in order to prevent commercial risks from happening. 2.3. Risks in payment (financial risks) Investopedia.com defines financial risk as “The risk that a company will not have adequate cash flow to meet financial obligations”. Another way of understanding is that financial risk is any risk that comes from lending people or entity money or selling them goods without receiving money first… (Farlex Financial Dictionary, 2011). In another words, financial risks are the probability that an actual return on an investment will be lower than the expected return (businessdictionary.com). Financial risks also concern one company being unable to pay off the debt to another company. Financial risks in international payment are economic risks happen during international payment transactions, this is the reason why they are also called Risks in Payment. The reasons come from relationship between partners in the operation such as sellers, buyers, banks… or other intermediary factors Risks in payment include unpredictable incidents that affects both sellers and buyers badly or even banks which provide international payment services to involved parties 12 Trầần Minh Phương – CQ503768 – Business English 50A 2.3.1. Credit risk 2.3.1.1. Definition According to Campbell R. Harvey (2011), credit risk is the risk that an issuer of debt securities or a borrower may default on its obligations, or that the payment may not be made on a negotiable instrument. David L. Scott explained in “Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor” that credit risk is the risk that a borrower will be unable to make payment of interest or principal in a timely manner (2003) Credit risks affect business results of the company badly. When debts are not paid partly or totally by scheduled, sellers will be in troubles, especially when credit risks combine with exchange rate risk and risk of interest. 2.3.1.2. Reasons for credit risk: The competitive market nowadays is among external reasons for credit risk. Price changes, outdated technology and equipment, financial crisis or global regression… create domino effect which affects many companies with difficulties, losses or even bankruptcy. Internal reasons are lack of information and poor management and administration skills. If a seller or buyer does not have a thorough grasp of partner’s financial situation and ability of payment or does not know well about international payment and the project they are doing, then credit risk is unable to be avoided. 2.3.2 Country risk 2.3.2.1. Definition Political situations and economic policies, foreign exchange management policies of a country may change from time to time. Those changes affect both sellers and buyers; sometimes they prevent buyers from getting payment and sellers from getting delivery. General understanding of country risk is probability of loss due to economic and/or political instability in the buyer's country, resulting in an inability to pay for imports (businessdictionary.com). Below is another definition of country risk in Farlex Financial Dictionary (2011): The risk that a foreign government will significantly alter its policies or other regulations so that it negatively impacts the business climate in that country or the returns on a particular industry, company, or project. Macro-country risk deals with policy changes that harm, say, exporters or foreign-owned businesses in general, while micro-country risk implies that a government will deliberately target a particular company or way of making a living. For example, the political climate of 13 Trầần Minh Phương – CQ503768 – Business English 50A a country in which defense contractors operate may turn against one particular company because of its perceived excesses or against defense contractors in general. This may cause the government revoke contracts for one or more defense contractors Recession and currency crisis of a country or an area play an important role to international payment of any import-export company. They are unexpected situations which will lead to the reduction or loss of liquidity of the contracts signed earlier. Besides, bank account embargo and blockade applied to accounts in foreign banks make company’s international payment more difficult, delayed or even lose ability to pay. When there are country risks, there are often credit risks, interest risks… go along with them and make them more serious. Country risks to buyers happen when buyers want to pay sellers but unexpected economic or politic incidents appear which make the buyers’ Government forbid them to pay foreign currencies to foreign companies, or imported goods are listed as not subjected to customs clearance. Country risks to sellers happen when there are changes in policy of foreign trade or customs in sellers’ country. The sellers are ready to export but upheavals happen such as tax for exporting increases or the to-be-exported goods are forbidden to export which make exportation postponed. 2.3.2.2. Reasons for country risk:  Conflicts of race, political parties, religion threaten the stability of a country.  Demonstrations, strikes, riots, wars.  The problem of foreign debt forces the importing government to use strong measures to forbid foreign payment or transfer foreign currency abroad.  Bad situations such as foreign currency reserves at a low level and the national balance of international payments face the heavily deficit force the Government of the importing country to take action to stop foreign payments immediately.  The economic international embargo on importing country puts all international activities and the Nostro accounts of the importing countries under strict control, or even be blocked so that banks cannot pay for foreign countries.  Foreign exchange management policy of importing countries suddenly changes, foreign exchange policy is tighten or forbidden in payment which poses risks to importers and their banks. 14 Trầần Minh Phương – CQ503768 – Business English 50A 2.3.3. Legislative risk 2.3.3.1. Definition Legislative risk is a risk occurs when there is a dispute or claim coming from the involved parties. The issue raised is that which country's court is going to handle the case and of which country will the law base on. Definition of legislative risk: Risk that a change in legislation could have a major positive or negative effect on an investment. For instance, a company that is a large exporter may be a beneficiary of a trade agreement that lowers tariff barriers, and therefore may see its stock price rise. On the other hand, a company that is a major polluter may be harmed by laws that stiffen fines for polluting the air or water, thereby making its share price fall. (John J. Capela, Stephen Hartman, 2011) 2.3.3.2. Reasons for legislative risk: Since there are differences in legal environment and the laws between parties and parties, no matter what international documentary credit selected which adjusts payment method selected (UCP-600 or not), in various countries this transaction was also adjusted and dominated by legal system of the local country. UCP and the laws of the countries altogether create a legal framework for L/C transaction of commercial banks in general when participating in international payment. However, the applying levels of each country are different up to the law of that country. Indeed, when there is a conflict between a term in L/C (no matter it follows UCP or not) and legal law of a country, the national legal law will be followed and disclaim UCP. Or another way of saying: the applying of UCP into L/C does not deny legal law and cannot prevent the Court from applying national legal law (Dr.Nguyen Van Tien, 2010) 2.3.4. Foreign exchange risk 2.3.4.1. Definition This type of risk often happens in L/C which requires fix kind of currency. When there is a change about exchange rate of that currency, sellers or buyers will get loss. If the price of fixed currency increases then the buyers will suffer a loss, vice versa, the sellers will get loss. Below is definition of foreign exchange risk, according to David L. Scott (2003): The risk that the exchange rate on a foreign currency will move against the position held by an investor such that the value of the investment is reduced. For example, if an investor residing in the United States purchases a bond denominated in Japanese yen, a deterioration in the rate at which the yen exchanges for dollars will reduce 15
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