The Pros And Cons Of Risks In International Trade
According to Celestine (2016), risks in international trade are divided into 3 groups such as country risks, foreign exchange risks and commercial risks. Country risks could be political situation, economic environmental and legal …show more content…
Transactions that is on the way could not be able to completed, leading to financial loss (Bank of Queensland, 2015).
In Nestle’s case, agreed transactions between Nestle Japan and suppliers or service providers in Australia or other countries could be interrupted by Japanese government, Australian government and government in other countries. This could lead to financial loss to either or both parties.
For political environmental risks, Nestle could not do anything to control this risk but they can hire legal consult services to reduce the risk of unforeseen government regulation relative to foreign transactions.
For financial risks, Nestle could use currency renegotiation or adjustment clauses and currency hedging to reduce risks of international transactions.
According to Celestine (2016), adjustment or renegotiation clauses has 2 types which are delivery-triggered adjustment clauses and time-triggered adjustment clauses. While currency hedging has 2 types which are future exchange contracts and forward exchange …show more content…
Regarding to their high amount of capital, Nestle can practice currency hedging both future exchange contracts and forward exchange contracts.
According to Celestine (2016), the organisation should plan the expenditure phasing over the period of time (monthly/quarterly/yearly) periods to extend the cash flow, reduce currency risks and over-expenditure. Nestle can gain opportunities, including interests from the bank from maximising the cash flow. In order to reduce risks of financial control, the most typical expenditure phrasing is monthly.
For Nestle, they could use their strong negotiation power due to the brand portfolio to convince suppliers/service providers to agree with monthly intervals. Nestle can reduce the risks of currency and over spending by preparing the payment in advance at least 1 month. Moreover, Nestle can lessen the risks of wrong payment by sum up all payments to one time at the end of month. Expenditure phrasing for Nestle to pay to international suppliers/services could start from suppliers deliver goods or provide services to Nestle with invoice to Nestle, then Purchasing officers gather invoices from suppliers and submit to Financial section. Financial officers plan the payments at the end of next month. At the end, credit term will be at 30 – 60 days. The author think that this period of credit term is suitable and acceptable