RISKS ASSOCIATED WITH TRADE

By BWA Envoy
March 09, 2022
2 Minutes Read

What are the risks associated with trade? Trade risks can be classified into four categories – Credit Risk, Commercial Risk, Country Risk, and Currency Risk. International Trade is subject to all these risks. Domestic trade deals with only credit risk and commercial risks. Let us understand these risks in detail.

Credit Risks deal with the financial incapability or intent of the buyer and/or the banks involved. While exchanging goods for consideration, one must be sure that the parties involved have clear intent, and a sound financial ability to make the requisite payments on time. Both international and domestic trade have this risk.

Commercial Risks refer to the risks involved while doing the business or carrying out the contract as agreed. Transportation risks, insurance risks, demand-supply gap, price fluctuation of the goods, perishability of the commodities, taxation, etc., are all part of commercial risk. However, this is not an exhaustive list. Commercial risks are part of both international and domestic trade.

Country Risks apply only to International trade where two or more countries are involved. The political stability of these countries, their specific agreements with other countries, sanctions imposed by the United Nations, and other governing bodies, etc., are part of the "Country Risks". Countries such as India may also have specific regulations to deal with international trade.

Currency Risk is also part of International trade only. Wherever the payment for a trade involves two or more currencies, parties are exposed to currency risk. The currencies of countries across the globe are volatile and tradeable. Hence the value of one currency vis-a-vis another keeps fluctuating. Thus, the parties involved in international trade must also take precautions to mitigate currency risk.

We shall discuss the ways to mitigate these risks in our next post.