Please show me a brief report which involved that me as a CEO of a Canadian firm wants to find a new snacks supplier from Japan, please explain the risk assessment below that we had done on this new supplier.

• Currency Risk Management ? how your company will benefit, an analysis if there is a shift in currency rate how will this shift affect your business more so price of your product. Outline measures you will put in place to mitigate risk
• Trade Finance
• Terms of Payment
• Contingencies in place in the event there is a break down in relationship between yourself and the supplier or for any unforeseen reasons supplies will be delayed or cannot be shipped

The attachment may help me answer the questions.

1 INTL 303 INTERNATIONAL FINANCIAL INSTITUTIONS & TRADE FINANCE Methods of Payment Week 10 2 3-3 OBJECTIVES Method of Payments Currency Risk Management Methods of Payment 4 The obligations that rest with both buyer and seller in relation to monetary settlement. cash in advance before delivery documentary letter of credit documentary collection bank transfer barter trade or counter-trade cheque Methods of Payment - Cash in Advance and /Open Account 5 Cash in advance before delivery - remitting payment to supplier prior to shipment of goods. Is this a good method of payment? Advantage/disadvantage it provides maximum security to the supplier and puts the buyer is at risk Methods of Payment 6 Documentary Letter of Credit- a commitment from the buyer's bank that they will pay to the supplier's bank as soon as the conditions outlined in the letter of credit have been met. Advantage - this most balanced method of payment Documentary Collection 7 Documentary Collection or bank collection, is a method of payment where the seller's and buyer's banks assist by forwarding documents to the buyer against payment or some other obligation, often acceptance of an enclosed draft (bill of exchange).* The basis for this form of payment is that the buyer should either pay or accept the draft, before they gain control over the documents that represent the goods. Documentary Collection 8 The collections are often divided into two main groups: Documents against payment (D/P) - when the bank notifies the buyer that the documents have arrived and requests them to pay the amount as instructed by the seller's bank. Documents against acceptance (D/A) - when the buyer is requested to accept a term draft (bill of exchange)* that accompanies the documents instead of payment Documentary Collection Advantage 9 Documents against acceptance: With this method of payment the buyer knows that the goods have been shipped and can examine the related documents before payment or acceptance Is this a good method of payment? Somewhat balance method of payment and it builds relationship 10 Method of Payment -Bank Transfer Funds are transferred by the buyer's bank to the supplier's bank Method of Payments 11 Counter-Trade 12 The word 'counter-trade' is in itself a general term, representing various types of connected transactions or reciprocal arrangements barter trades - with payment in other goods; compensation trades - payment partly in money and goods or services to balance the transaction repurchase agreements -payment is made through products, offset counter-trades - mostly with settlement in money, but with the transaction being dependent on corresponding sales/purchase transactions to balance the payment stream. Why Counter-Trade? 13 To enable trade to take place in markets which are unable to pay for imports. This can occur as a result of a non-convertible currency, a lack of commercial credit or a shortage of foreign exchange. To protect or stimulate the output of domestic industries and to help find new export markets. As a reflection of political and economic policies which seek to plan and balance overseas trade. To gain a competitive advantage over competing suppliers. Payment Delays 14 What factors would cause a delay in payment? Reasons for Delayed Payments 15 a. b. c. d. e. f. g. Factors that would cause a delay in payment: non-acceptance of delivery Bank credit limits Suppliers payments are often based on open account payment terms, ie without a bill of exchange or similar instrument The buyer delay the payment until they have been paid by their customer The buyer may have limited foreign currency larger corporations often have internal payment systems with batch payments made at certain intervals during the month Liquidity or solvency problems Currency Risks 16 Currencies have been divided into groups of 'strong' and 'weak' currencies, and this view has affected the general conception of preferred trade currencies, even though the highest preference is often for the currency of the home country. Currency Risk Management 17 Interbank trading provides liquidity for anyone wishing to trade in foreign exchange a) The spot rate is the rate at which a foreign exchange trade can be immediately transacted ( 2 days ) Currency Risk Management 18 Forward Rate - Currencies traded for settlement on a day later than 2 days are traded at the forward rate. The forward contract creates an obligation between a bank and its customer to exchange a fixed amount of one currency for a second currency, at an agreed rate and date. The settlement date can be any business day and it is not unknown for forward agreements to stretch a number of years. Currency Risk Management 19 As an importer or exporter how can you manage foreign exchange risk? Currency Risk Management 20 Hedging currency risks a.choice of invoicing currency b.currency steering c.payments brought forward d.forward currency contracts e.currency options f.short-term currency loans g.currency clauses h.tender exchange rate insurance 21 Choice of Invoicing Currency Choice of invoicing currency -Three different types of currency can be involved in any cross-border trade trans-action: the seller's currency; the buyer's currency, if it is a common convertible currency; a third country currency, often USD or sometimes EUR Choice of Invoicing Currency 22 Invoicing in sellers own currency is the easiest way for the seller to eliminate the currency risk: Advantage: it transfers the currency risk to the buyer, which could make it more difficult for them to evaluate the profitability of the transaction Disadvantage: increase the risk for the seller of not getting the business, particularly if the buyer receives other, more competitive offers in their own currency A Third Country Currency 23 The questions to consider are: Is the invoicing currency freely convertible and actively traded? Does it have the trading volumes needed to give it market stability? Is it stable in the interbank markets for loans and deposits? Is the forward market working properly for the volumes and time periods that may be applicable to the transaction? Currency Steering 24 Company can influence or manage their own currency position, particularly if having both incoming and outgoing payments in the same currency - open different currency account with your bank Payments Brought Forward 25 It is always advantageous for the buyer to agree to an earlier payment to reduce the currency risk if invoice is in a foreign currency Payments can also be divided into parts -pre-delivery and post delivery 26 Forward Currency Contracts The most commonly used method of hedging currency risks is through a forward contract with a bank. Through the forward contract, the company agrees with the bank to sell or to buy the invoiced currency at a certain rate with a fixed delivery date. This forward rate may be higher or lower than the spot rate at that time, Currency Options 27 The holder of the option has the right, but not the obligation, to buy or to sell a particular currency at an agreed rate and date. It may therefore be used as an alternative or as a supplement to a forward contract. Short-Term Currency Loans 28 A loan in a foreign currency is primarily a form of finance, but can also be used by the buyer to hedge the value of a future incoming foreign currency payment: By immediately using the loan to make the payment On the due date of the loan it will be repaid by the incoming currency payment from client Currency Clauses 29 Both commercial parties want to avoid the exchange risk-the risk is shared. With a 'cap and floor' agreement with the buyer and seller for example an Australian exporter may accept EUR as the invoicing currency, but with a fixed exchange rate floor against AUD. If the EUR weakens below the floor rate during the contract period, the seller would then automatically be compensated through receiving a correspondingly higher EUR amount. The parties could also agree on a similar cap to the buyer's advantage, thereby paying a lower amount if the EUR strengthens above a certain exchange rate Any Questions ? 30 31 Tender Exchange Rate Insurance The exchange risk during the period when the bid or tender is open is one of the factors that can make the transaction particularly risky. The buyer risks losing money when tendering at a fixed price in a foreign currency - while obviously wanting the tender to be successful, the buyer could lose out in the contract if the currency weakens during the period between submitting the offer or tender and winning the contract Export Credit Insurance 32 Lets look at insuring the goods Export Credit Insurance 33 Export credit refers to the credit that the seller offers the buyer in the contract for sale of goods and services (ie a supplier credit) or credits given to finance such a sale (ie a buyer credit), Export Credit Insurance 34 Export credit insurance is normally divisible into commercial and political risks: The commercial risk is that which rests with the buyer, ie their ability to pay for what has been purchased The political risk is that associated with the buyer's country and includes losses arising from events such as cancellation of an import licence, war and change in regulations Export Credit Insurance 35 To calculate this risk and its inherent costs, three factors have to be considered: capital risk - the amount of capital not covered by the insurance, which the seller has to retain at their own risk interest risk - the uninsured parts of any credit given to the buyer settlement risk - the interest due for the period before payment is made under the insurance Political Risk Insurance 36 Contract frustration policy:- impossible for the seller to fulfil their contractual obligations towards the buyer-changed or revoked approvals licences or guarantees Investment insurance:- confiscation, expropriation, or deprivation of the investor's fixed or mobile assets overseas. The cover includes war, civil war, strikes, riots, terrorism, or regulatory changes, Trade Finance 37 Trade Options Trade Finance 38 The expression 'trade finance' generally refers to the financing of the fluctuating working capital needs for either single or bulk trade transactions Financial Risks 39 Every international trade transaction contains an element of financial risk: a)production cost b)shipment cost c)Payment - credit d)bureaucratic delays Trade Finance 40 Pre-Shipment Finance 41 The expressions 'pre-export finance' and 'preshipment finance' (sometimes also called 'packing finance') are defined as the temporary working capital requirement needed for the fulfilment of one or several specific export transactions. This covers the cash flow (and guarantees, if any) related to costs of raw material and other goods, labour, equipment and overheads, until final payment - or until the earlier stage where receivables or debt instruments are received from the buyer, which can be refinanced. Bank Loans & Trade Finance Limits 42 The most common method of refinancing short-term supplier credits is simply by using the seller's existing bank credit limits: the current account overdraft facility Supplier Credits 43 Supplier credits are the most commonly used method of trade finance, mainly for shorter periods but to a lesser degree also for mediumterm periods. Its structure is determined by: the time-span of the credit its size the buyer's country the method of payment agreed in the sales contract - details that determine not only the seller's risk exposure but also the structure required by the financial institution, should the credit have to be refinanced at a later stage Invoice Financing 44 Financing is given against the bulk of receivables or invoice Suitability Invoice discounting is suitable for most companies especially smaller and rapidly growing companies whose balance sheets would not be sufficiently strong to allow for the volume of ordinary credit limits they may need for their expanding business. Export Factoring 45 Factoring is a special form of short-term finance where a finance company purchases the seller's receivables and assumes the credit risk, either with or without recourse to the seller Buyer Credits 46 Buyer credits are given directly to the buyer or the buyer's bank in connection with the export transaction Credit amount is normally 80-85 per cent of contract value; the buyer pays the remaining part-payment directly to the seller at or before delivery