Illustrate management of commercial and political risk, Financial Accounting

Q. Illustrate Management of commercial and political risk?

Commercial risk comprises both the physical risk that goods in transit may be lost stolen or destroyed as well as the risk that the buyer will not make payment for the goods according to the terms of the sale. Where the actions of a foreign government prevent or else delay payment being made political risk is said to be involved. Government action is able to take many forms ranging from bureaucratic delays to war with the country of the exporter.

An easy way to protect against these forms of risk is insurance. Physical risks of merchandise in transit may be covered through normal commercial insurance. The risk of non-payment or else delayed payment may be insured through specialist providers of export credit insurance. In the UK the largest source of short-term export credit insurance is NCM Holdings which has taken over the short-term activities of the government owned ECGD (Export Credits Guarantee Department). Protection beside commercial risk might also be possible by using an export factoring company but the size of your company's export activities is not currently large enough to use a factor.

Commercial risk may be abridged by careful credit screening of any overseas customers prior to signing the contract and by the way that the terms of the foreign trade are arranged. For instance if you arranged for your exports to be linked to a confirmed irrevocable letter of credit this denotes that payment to you is guaranteed by at least one bank making the risk of not receiving payment very low. Such an arrangement will nevertheless incur extra costs.

Posted Date: 7/12/2013 3:16:02 AM | Location : United States

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