Insurance
Insurance
In addition to the various methods of avoiding nonpayment, insurance against marine, commercial, and political risk also is available.
Avoiding Shipping Risks.
Marine cargo insurance is an essential business tool for import/export. Generally, you purchase coverage on a warehouse-to-warehouse basis (i.e. from the sender's factory to the receiver's platform). Coverage usually ceases a specific number of days after the ship or plane is unloaded. You purchase policies on a per shipment or "blanket" basis. Freight forwarders usually have a blanket policy to cover clients who do not have their own policy. Most insurance companies base cargo insurance on the value of all charges of the shipment, including freight handling, etc., plus 10% to cover unseen contingencies. Rates vary according to product, client's track record, destination, and shipping method.
Ocean cargo insurance costs about $.50 to $1.50 per $100.00 of invoice value. Air cargo is usually about 25% to 30% less.
Avoiding Political Risk.
No two national export credit systems are identical. However, there are similarities, the greatest of which is the universal involvement of government through the export credit agency concerned and of the commercial banking sector in the workings of the system.
In the United States, the Export-Import Bank (EXIMBANK) serves by providing credit support in the form of loans, guarantees, and insurance. EXIMBANK cooperates with commercial United States and foreign banks in providing a number of arrangements to help United States exporters offer credit guarantees to commercial banks that finance export sales. Through the Overseas Private Investment Corporation (OPIC) and the Foreign Credit Insurance Association (FCIA), EXIMBANK also provides insurance to United States exporters, enabling them to extend credit terms to their overseas buyers. Private insurers cover the normal commercial credit risks; EXIMBANK assumes all liability for political risk.
The programs available through OPIC and FCIA are advertised well and easily are available. Commercial banks are essentially intermediaries to the EXIMBANK for export guarantees on loans (beginning at loans up to 1 year and ending at loans of up to 10-15 years). FCIA offers insurance in two basic maturities: (1) short-term policy of up to 180 days, (2) a medium-term policy from 181 days up to 5 years; or you might obtain a combination policy of those maturities. FCIA also has a master policy providing blanket protection (one policy designed to provide coverage for all the exporter's sales to overseas buyers).
Avoiding Foreign Exchange Risk.
When the dollar is strong—as strong as it was in the early 1980s—traders prefer to deal in the dollar. When the opposite is true, traders begin to deal in other currencies. The dollar is as good as gold. It is a politically-stable currency, and is traded internationally. It has become the vehicle currency for most international transactions because it is the world's major trading currency.
So long as American exporters deal only in the dollar, there is no foreign exchange risk. However, the strength and popularity of currencies is cyclic, and the dollar is not always the leader. Often, an exporter is faced with the prospect of pricing products or services in currencies other than United States dollars. Importers must buy foreign currency to pay for products and services from risk-avoiding foreign suppliers demanding payment in their own currency. In the current era of floating exchange rates, there are risks due to exposure whenever there are cash flows denominated in foreign currencies.
Successfully managing currency risk is imperative. No longer can an importer/exporter speculate by doing nothing, then pass their foreign exchange losses on to customers in the form of higher prices. The best business decision for an importer/exporter is to hedge or cover in the forward market when there is risk of exposure. To do otherwise is to be a speculator, not a businessperson. Use the forward rate for the date on which payment is required. This rate avoids all foreign exchange risk, is simple, and is reasonably inexpensive. The cost of a forward contract is small—the difference between the cost of the spot market (today's cost of money) and the cost of the forward market. Major international banks and brokerage houses can help you arrange a foreign-exchange forward contract. Spot and forward markets are quoted daily in the Wall Street Journal.
<em>Exposure is the effect on a firm or an individual if there is a change on exchange rates.
Hedging or covering is the use of the forward foreign exchange market to avoid foreign currency risk.
The forward or future exchange rate is the rate that is contracted today for the delivery of a currency at a specified date in the future, at a price agreed upon today.</em>
In addition to the various methods of avoiding nonpayment, insurance against marine, commercial, and political risk also is available.
Avoiding Shipping Risks.
Marine cargo insurance is an essential business tool for import/export. Generally, you purchase coverage on a warehouse-to-warehouse basis (i.e. from the sender's factory to the receiver's platform). Coverage usually ceases a specific number of days after the ship or plane is unloaded. You purchase policies on a per shipment or "blanket" basis. Freight forwarders usually have a blanket policy to cover clients who do not have their own policy. Most insurance companies base cargo insurance on the value of all charges of the shipment, including freight handling, etc., plus 10% to cover unseen contingencies. Rates vary according to product, client's track record, destination, and shipping method.
Ocean cargo insurance costs about $.50 to $1.50 per $100.00 of invoice value. Air cargo is usually about 25% to 30% less.
Avoiding Political Risk.
No two national export credit systems are identical. However, there are similarities, the greatest of which is the universal involvement of government through the export credit agency concerned and of the commercial banking sector in the workings of the system.
In the United States, the Export-Import Bank (EXIMBANK) serves by providing credit support in the form of loans, guarantees, and insurance. EXIMBANK cooperates with commercial United States and foreign banks in providing a number of arrangements to help United States exporters offer credit guarantees to commercial banks that finance export sales. Through the Overseas Private Investment Corporation (OPIC) and the Foreign Credit Insurance Association (FCIA), EXIMBANK also provides insurance to United States exporters, enabling them to extend credit terms to their overseas buyers. Private insurers cover the normal commercial credit risks; EXIMBANK assumes all liability for political risk.
The programs available through OPIC and FCIA are advertised well and easily are available. Commercial banks are essentially intermediaries to the EXIMBANK for export guarantees on loans (beginning at loans up to 1 year and ending at loans of up to 10-15 years). FCIA offers insurance in two basic maturities: (1) short-term policy of up to 180 days, (2) a medium-term policy from 181 days up to 5 years; or you might obtain a combination policy of those maturities. FCIA also has a master policy providing blanket protection (one policy designed to provide coverage for all the exporter's sales to overseas buyers).
Avoiding Foreign Exchange Risk.
When the dollar is strong—as strong as it was in the early 1980s—traders prefer to deal in the dollar. When the opposite is true, traders begin to deal in other currencies. The dollar is as good as gold. It is a politically-stable currency, and is traded internationally. It has become the vehicle currency for most international transactions because it is the world's major trading currency.
So long as American exporters deal only in the dollar, there is no foreign exchange risk. However, the strength and popularity of currencies is cyclic, and the dollar is not always the leader. Often, an exporter is faced with the prospect of pricing products or services in currencies other than United States dollars. Importers must buy foreign currency to pay for products and services from risk-avoiding foreign suppliers demanding payment in their own currency. In the current era of floating exchange rates, there are risks due to exposure whenever there are cash flows denominated in foreign currencies.
Successfully managing currency risk is imperative. No longer can an importer/exporter speculate by doing nothing, then pass their foreign exchange losses on to customers in the form of higher prices. The best business decision for an importer/exporter is to hedge or cover in the forward market when there is risk of exposure. To do otherwise is to be a speculator, not a businessperson. Use the forward rate for the date on which payment is required. This rate avoids all foreign exchange risk, is simple, and is reasonably inexpensive. The cost of a forward contract is small—the difference between the cost of the spot market (today's cost of money) and the cost of the forward market. Major international banks and brokerage houses can help you arrange a foreign-exchange forward contract. Spot and forward markets are quoted daily in the Wall Street Journal.
<em>Exposure is the effect on a firm or an individual if there is a change on exchange rates.
Hedging or covering is the use of the forward foreign exchange market to avoid foreign currency risk.
The forward or future exchange rate is the rate that is contracted today for the delivery of a currency at a specified date in the future, at a price agreed upon today.</em>
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