Complete This Essay In A Microsoft Word Document Answ 327775
Complete This Essay In A Microsoft Word Document Answer Each Of The E
Complete this essay in a Microsoft Word document, answer each of the essay question 450 words; APA formatted and 5% similarity. Make sure you use adequate, credible and reliable APA source 2 citations to support your work. Consider the basic methods of payment for international trade. Describe the pros and cons of each. If your company intends to purchase products from a foreign source, how will you protect it from risk of financial loss?
Support and defend your choice. Instructions: Your initial response should be no less than 450-words with at least one scholarly journal reference (dictionary-type websites are excluded). Include in-text citations and references in APA format. Refer to Forums Grading Rubric for additional guidelines.
Paper For Above instruction
International trade relies on several core payment methods that facilitate cross-border transactions between companies and countries. These methods include cash-in-advance, open account, letter of credit, and documentary collections. Each approach carries specific advantages and disadvantages that influence the financial risk, cash flow, and trust levels between trading partners.
The cash-in-advance method requires the buyer to pay the seller before shipment. This method secures the seller against non-payment but places the transaction risk primarily on the buyer, who may face delays or disputes. Its primary advantage is minimized risk for exporters, but it can deter potential buyers due to the upfront payment requirement. Conversely, open account transactions involve the seller shipping goods and trusting the buyer to pay at a later date, typically within 30 to 60 days. While this approach fosters trust and encourages sales, it exposes the seller to significant credit risk, especially if the buyer defaults (Cavusgil et al., 2014).
The letter of credit (LC), governed by banks, offers a middle ground by ensuring payment upon fulfilling agreed terms. The seller is assured of payment once the conditions are met, which mitigates the risk of non-payment. However, LCs involve high banking fees and administrative complexity, and both parties need to rely on banks' credibility (Hill, 2014). Documentary collections present an intermediary solution where banks handle the documents, but payment depends on the buyer's acceptance of bills, leaving some risk if the buyer refuses payment. It is less secure than LCs but less costly and administratively simpler.
When purchasing from a foreign source, protecting against financial loss is crucial. A common strategy is employing a letter of credit because it provides financial security, protects both parties, and ensures compliance with contractual terms. Additionally, credit insurance can safeguard against the risk of buyer insolvency or default. Diversifying sources and conducting thorough due diligence on foreign partners also mitigate risks, including political, economic, and currency fluctuations (Knickerbocker & Ward, 2017). Currency hedging methods, such as forward contracts, further shield companies from exchange rate volatility during transactions.
For my company, I would recommend utilizing a letter of credit as the primary payment method. Its advantages in reducing exposure to non-payment and providing contractual assurance outweigh its cost and complexity. Coupled with credit insurance and foreign exchange hedging, this approach creates a comprehensive risk management framework. This enables my company to maintain financial stability while engaging in international trade, fostering trust with foreign suppliers and minimizing potential losses.
References
- Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2014). International Business (2nd ed.). Pearson Australia.
- Hill, C. W. L. (2014). International Business: Competing in the Global Marketplace (10th ed.). McGraw-Hill Education.
- Knickerbocker, J. R., & Ward, H. (2017). Global Trade and Finance. Routledge.