In the rapid changing world of international trade, companies face many financial risks that can affect their profitability and stability. These financial risks include exchange rates, delays in international payment and lack of transparency in trade contracts. Effective management of these risks is necessary to maintain financial stability and succeed in global markets. In this article, we will detect financial risk management strategies and how to reduce the impact of currency and international payment challenges.

Types of Financial Risk in International Trade

1.Exchange Rate Fluctuations Risk

Fluctuations in exchange rate can affect the value of international transactions and cause financial losses. Some of the direct effects of the ups and downs in the exchange rate on international trade are:

• Increased import costs if the local currency depreciates
• Decreased export profits when the local currency appreciates
• Pricing instability of international goods
• Reduced competitiveness of companies

2.Credit Risk

Credit risk refers to the possibility of non-payment by foreign buyers. Inadequate credit assessment of customers or uncertainty about the banking systems in the destination country can result in financial losses for sellers. Some strategies to reduce credit risk include:

• Thorough review of clients’ financial and business records
• Getting financial guarantee and use letters of credit
• Collaboration with reputed financial institutions to reduce the possibility of non-payment

3.liquidity risk

Liquidity risk arises when a company is unable to secure adequate financial resources to fulfill its obligations. Delay in international payment, limited access to foreign currencies, and changes in banking rules are among the factors that induce liquidity risk.

4.operating risk

Issues arising from internal processes, international payment systems and human errors can cause financial loss. Lack of integrated financial systems and the absence of required standards for international payment increases the possibility of this risk.

strategies for exchange rate fluctuations management

To reduce the results and risks arising from the currents, many strategies can help manage and reduce these financial risks effectively. These management strategies include:

1. Hedging contracts

One of the best ways for management of fluctuations is the use of specific financial tools that helps companies to reduce the risks that causes changes in exchange rates. These tools include:

• Forward Contracts: Agreement to buy or sell currency at a specified rate in future, which helps stabilize the cost.
• Options: These contracts give the holder the rights, but not the obligation, to buy or sell currency at a certain rate in future.
• Currency Swap: Financial exchange between two companies or countries that reduce the risks arising from the exchange fluctuations and transactions.

2. Diversifying currencies

Successful companies should avoid relying on one single currency and instead use a diverse currency portfolio for their transactions. Major strategies in this field include:

• Multi-Currency Transactions: Payment and receipt in more stable currencies such as euros, US dollars and Japanese yen.
• Creating several currency accounts: Keeping financial resources in various currencies to increase flexibility.
• Using local currencies in regional transactions: Reducing currency conversion costs and improving financial stability in international trade.

Strategies for proper Managing of Payment Challenges in International Trade

There are various challenges in international trade, and knowing them can prepare you better to find an existing solution. To manage challenges related to payment in international trade, consider implementing the following strategies:

1. Choosing reliable payment methods

Companies can ensure timely payment and prevent financial issues using the following methods:

• Letter of Credit (LC): A bank-guaranteed payment that eliminates the risk of non-payment.
• International wire transfer: Direct fund transfer between parties which requires high trust between parties.
• Payments through safe platforms like PayPal and Swift: These methods significantly reduce the risks of delayed fund transfer and banking issues.

2. Trade Credit Insurance

Business credit insurance is one of the best equipment to reduce payment risk, protect companies against delayed payment from foreign customers. Benefits include:

Low liquidity risk: In case of non-payment, insurance compensates for expenses.

Increased transaction security: These insurances are especially important for transactions with economically unstable countries.

3.Customer Credit Assessment and Trade History Evaluation

Before entering into trade contracts, assessing the financial condition and credit history of foreign clients is essential. Key steps in credit assessment include:

• Reviewing clients’ financial and trade history through international banks or credit rating agencies like Dun & Bradstreet and Experian.
• Assessing the destination country’s risk: analyzing the buyer country’s economic situation and tax regulations.
• Using bank reports to analyze potential buyers’ financial performance and liquidity.

The Best Payment Method in International Trade

Depending on the type of transaction, various payment methods are recommended in international trade:

• Letter of Credit (LC): For large transactions requiring bank guarantee.
• International wire transfer: for quick and direct international payment.
• Swift or PayPal Payment: To reduce risks for smaller transactions and fund transfer.

 The role of Mahta Vista Kish in Financial Risk Management

Mahta Vista Kish, by offering specialized financial and consulting services, helps companies active in international trade minimize their financial risks. The services offered by this company include:

• Consultation on currency hedging strategies: providing appropriate solutions to reduce the effects of ups and downs in exchange rates.
• Evaluation and analysis of buyer credit risks: Complete review and analysis of customers and business partners to reduce the possibility of non-payment.
• Guidance in choosing secure payment methods: Helping companies use international financial systems and reduce payment risks.

Stay tuned with Mahta Vista

Management of financial risks in international trade – especially in exchange rates and payments challenges – is important to maintain financial stability and succeed in global markets. Using special financial instruments, customer credit assessment, business credit insurance, and cooperating with professional financial institutions like Mahta Vista Kish, can help companies effectively manage these risks and take advantage of international trade opportunities.