International Finance and Risk Management

Table of Contents

Executive Summary

List of Abbreviations

List of Tables & Figures

1 Introduction

2 Main Part
2.1 Country analysis using SWOT
2.2 Differences between commercial risks and political risks
2.3 INCOTERMS
2.3.1 Definition and application
2.3.2 INCOTERMS groups
2.3.3 Recommendation for the company
2.4 Payment terms
2.5 Collection
2.6 Comparison between Collections and Letter of credits
2.7 Recommendation to favourite payment for the company
2.8 Long-term loan in EURO (EUR) or SWISS FRANCS (CHF)
2.9 Money transfer inside Europe and to the US

3 Conclusion

Executive Summary

The international expansion offers companies today new growth opportunities and high potential to increase their sales volume. However, several problems concerning to risk management require suitable solutions which could be only provided based on a thorough risk analysis and deep understanding in international financing.

In this study risks and opportunities for international expansion of a medium sized company in Lebanon, Russia and Turkey are evaluated using SWOT analysis. Thereby, political and commercial risks items are compared to each other. Furthermore, various terms, e.g. INCOTERMS, Payment terms, Collection and Letter of credits, are studied and illustrated. Additionally, benefits and drawbacks of the repaying of company's loan in Euro or Swiss Francs are weighted. Finally, the possibilities of money transfer inside Europe and to the US are described. Besides the theoretical reflection concrete recommendations are given for the company.

List of Abbreviations

illustration not visible in this excerpt

List of Tables & Figures

Table 1 – Differences between Collections and Letter of credit

Figure 1 – Exchange rate EUR/CHF in the last 5 years

1 Introduction

The globalization enables companies a rapid expansion of their international businesses. In particular, the former export champion Germany gets higher profits from increased worldwide business activities and sales opportunities. However, while the international expansion reaches daily new records, the risks for international business remain and should be considered seriously. The risks of international business are from different types and include economic, political, manufacturing, currency, and transport risks^[1]. For export transactions risk analysis of buyer and buyer's country plays an important role. Based on a thorough risk analysis, terms of payment and terms of delivery in the contract of sale could be developed. Moreover, hedging instruments like advance payment, letter of credit, payment guarantee from a bank, government Euler Hermes coverage, transport insurance and others arrangements could be used for international financing.

The object of this study is to learn and understand about international finance and risk management through evaluation of risks and opportunities for international expansion of a medium sized company. Thereby, country risks of Lebanon, Russia and Turkey are appraised using SWOT analysis. Furthermore, differences between political and commercial risks are studied. Various terms, e.g. INCOTERMS, Payment terms, Collection, and Letter of credit, are explained and compared. In addition, pros and cons of repaying of company's loan in Euro or Swiss Francs are assessed. Finally, the possibilities of money transfer inside Europe and to the US are illustrated. Besides the theoretical reflection concrete recommendations are given for the company.

2 Main Part

2.1 Country analysis using SWOT

In order to prepare the decision for business expansion of the company a SWOT analysis of Russia, Turkey, and Lebanon is provided:^[2],^[3],^[4]

1. Russia:

- Strengths:

- High economic growth (6.1 % in 2008) due to strongly increasing of oil and gas prices.
- Low systemic risk in the banking sector due to the large share of state-owned banks and very healthy public finances.
- Minimal public debt and low sovereign risk.
- Rating:
- Local currency (Standard & Poors): A-
- Country risk (OECD, Hermes): 3

- Weaknesses:

- Lower economic growth on the medium term due to uncertain property rights, large role of state-owned companies, eroding relative competitiveness of the non-extractive industries and problems in expanding oil and gas production.
- Increased inflation (14.1 % in 2008).

- Opportunities:

- Reduced political uncertainty (President Putin has strengthened the institutions of the state and rolled back the danger of an extremist government).

- Threats:

- No independent judiciary.
- Fall in oil price has a significant impact on account balances.
- Business slowdown causes a sharp fall in economic growth (from 6.1 % in 2008 to estimated 1.5 % in 2009).
- Weakening of the country currency Rouble.
- Decreasing of foreign exchange reserves by more than 25 % since August 2008.

2. Turkey:

- Strengths:

- No risk for internal political stability.
- Dynamic economy did well in the global financial crisis.
- Banking fundamentals like profitability, capitalization, asset quality and provisioning are healthy.

- Weaknesses:

- Political situation remains volatile.
- Stagnating export, lower GDP growth (3.1 % in 2008 and estimated 2.5 % in 2009).
- Huge financing requirement of 110 bn USD for 2009 will be hard to secure.
- Rating:
- Country ratings long-term risk (HVB): Ba3
- Default risk short-term (HVB): 5-
- Local currency (Standard & Poors): BB
- Country risk (OECD, Hermes): 4

- Opportunities:

- Government accelerated political and democratic reforms. The relation with the neighbouring countries improved.

- Threats:

- Increasing risks via the foreign trade channel and by financial factors.
- Weaker export market, tighter credit conditions, deteriorating consumer and business sentiment, and strong inflation (10.5 % in 2008).
- High external debt (330 bn USD in 2009).
- Weakening of the country currency Lira.
- Low foreign exchange reserves.

3. Lebanon:

- Strengths:

- Political situation begins to be stabilized.
- Growth in tourism and investment.
- Low inflation (5.7 % in 2008).

- Weaknesses:

- The Israeli-Hizballah conflict in July-August 2006 caused an estimated $3.6 billion in infrastructure damage, and prompted international donors to pledge nearly $1 billion in recovery and reconstruction assistance.
- High external debt (52.5 bn USD or 338.7 % of fx receipts g&s in 2008)
- Rating:
- Local currency (Standard & Poors): CCC+
- Country risk (OECD, Hermes): 7

- Opportunities:

- New government was formed in July 2008. Political stability has helped to boost investment and tourism.
- High demand for infrastructure reconstruction.

- Threats:

- Economic growth is likely to slow in 2009 as a result of the global economic recession.
- In fall 2008 the government postponed telecommunication privatization and raised public sector wages, actions that in 2009 will widen the budget deficit and increase government debt.

From the SWOT analysis it could be recommended that the company has to go first to Russia, second to Turkey, and third to Lebanon. The advantages for individual country are:

- Russia: High economic growth, low systemic risk, and reduced political uncertainty.
- Turkey: Healthy banking sector and accelerated political and democratic reforms.
- Lebanon: High demand for infrastructure reconstruction and low inflation.

[...]

^[1] Deisenbeck (2006). p. 9–14.

^[2] HypoVereinsbank (2009). Country risk analysis. Available from

http://www.hypovereinsbank.de/portal?view=/research/213695.jsp (accessed on 14.02.2009).

^[3] Available from http://www.ducroiredelcredere.co.uk/Webduk/WebSite.nsf/AllWeb/Lebanon?

OpenDocument&Disp=1 (accessed on 14.02.2009).

^[4] Available from http://www.oecd.org/tad/xcred/ (accessed on 14.02.2009).