Finance and Risk Management Quiz

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Questions and Answers

Which of the following risks is classified as a commercial risk in export credit insurance?

Foreign importer insolvency (correct)

Exchange rate fluctuations

Political unrest in the importer’s country

Natural disasters affecting shipping

What does the co-insurance ratio indicate regarding export credit insurance?

The extent of risks covered under the policy

The total amount of insurance cap offered

The level of premium payable by the exporter

The percentage of risk that the insurer retains (correct)

Which service is NOT typically provided by an export credit insurer?

Regulatory compliance audits (correct)

Country risk information

Market entry strategy sessions

Credit reports and analysis

What could happen if an importer refuses to accept or take delivery of goods?

It is considered a default by the importer. Signup and view all the answers

In the context of export credit insurance, what type of risk is primarily associated with bankruptcy of the foreign importer?

Commercial risk Signup and view all the answers

What does open account trade primarily rely on?

An invoice raised by the seller Signup and view all the answers

In open account transactions, what is the primary obligation of the buyer?

To meet the payment obligation Signup and view all the answers

Which aspect distinguishes open account trade from cash in advance transactions?

Payment agreement for a future date Signup and view all the answers

What is the primary role of export credit agencies (ECAs)?

To support the development of exports Signup and view all the answers

What role do finance providers play in supply chain finance (SCF) transactions?

They collaborate with buyers and sellers to raise finance Signup and view all the answers

How do ECAs assist companies in international trade?

By offering risk mitigation and export financing Signup and view all the answers

Which of the following best describes the parties involved in supply chain finance (SCF)?

Buyers, sellers, and finance providers Signup and view all the answers

What types of services do export credit agencies typically provide?

Export financing and risk insurance Signup and view all the answers

What characterizes the techniques of supply chain finance?

They encompass both established and evolving methods Signup and view all the answers

Why are ECAs considered important in international trade?

They facilitate collaboration and promote export growth Signup and view all the answers

Which of the following represents a fundamental characteristic of open account trade?

Direct payment responsibility by the buyer Signup and view all the answers

What aspect of international trade do ECAs help companies to manage?

They help manage risks associated with international markets Signup and view all the answers

Why might trading on open account terms be favored over cash in advance?

It allows for more flexibility in payment timing Signup and view all the answers

In what way can ECAs contribute to corporate social responsibility?

By ensuring ethical practices in exporting Signup and view all the answers

What is one of the critical resources provided by ECAs for companies?

Access to information about global market opportunities and challenges Signup and view all the answers

What is the relationship between goods and services traded between countries called?

International Trade Signup and view all the answers

What percentage of total claims does the insurer pay in a 90 percent co-insurance policy?

90 percent Signup and view all the answers

What is the primary purpose of a deductible in insurance policies?

To reduce the cost to the insurer Signup and view all the answers

What portion of loss does the exporter absorb under a 90 percent co-insurance policy?

10 percent Signup and view all the answers

In what circumstance would an exporter typically need to issue letters of guarantee?

For foreign contracts through their bank Signup and view all the answers

Which of the following best describes the term 'wrongful call insurance'?

Insurance protecting against unjustified calls on guarantees Signup and view all the answers

What is required by banks to secure their position when exporters seek financing?

100% collateral Signup and view all the answers

How does the export guarantee program offered by ECAs benefit exporters?

By enabling the acquisition of more international contracts Signup and view all the answers

What does wrongful call insurance protect against?

A customer's unfounded claim against the letter of guarantee Signup and view all the answers

What is one major area that export credit agencies (ECAs) support regarding international business activity?

Foreign Direct Investment Insurance Signup and view all the answers

What is one effect of ECAs' guarantees on exporters' cash flow?

It frees up the company's cash flow. Signup and view all the answers

For how long can foreign investment insurance typically be secured through ECAs?

Up to 15 years and beyond Signup and view all the answers

Which of the following is NOT a benefit of the export guarantee program?

Reducing production costs Signup and view all the answers

What risk does foreign investment insurance cover?

Nationalization and expropriation Signup and view all the answers

Study Notes

Importance of Export Credit Agencies (ECAs)

ECAs are government agencies aimed at promoting exports by providing financial support.
They help mitigate commercial risks, making international trade more attractive to businesses.
Offer financing options, various types of risk insurance, and guarantees for exporters.
Significant resources for market intelligence on countries and industries, enhancing strategic decision-making.

Export Promotion and International Trade

Exports involve goods and services produced in one country and sold to buyers in another.
International trade comprises both exports and imports, encompassing a wide range of financing techniques and risk management strategies.
Open account trade occurs when sellers and buyers complete transactions without banking instruments; payment terms depend on invoices.

Supply Chain Finance (SCF)

SCF involves collaboration between buyers and sellers to optimize cash flow along the supply chain.
Risks covered by export credit insurance include political and commercial risks, and the co-insurance ratio between insurer and insured is a key factor.
Specific factors to consider in export credit insurance include risks covered, insurer services, and deductible amounts.

Risks Covered by Export Insurance Policies

Commercial Risks: Include importer insolvency, contractual defaults, and refusal to accept goods.
Insurers typically cover significant portions of claims, such as 90% in a co-insurance arrangement, with the exporter absorbing some loss.

ECA Products and Services

Guarantees: Banks often require 100% collateral from exporters; ECAs provide guarantees that reduce this burden, enabling increased international contracts and better cash flow management.
Wrongful Call Insurance: Protects exporters from unsubstantiated calls on letters of guarantee by clients, ensuring financial security against arbitrary actions.

Foreign Direct Investment Insurance

ECAs support foreign investments, providing insurance for risks like war, expropriation, and nationalization for terms up to 15 years or more.
This insurance is critical for reducing risks associated with international business activities and investments.

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Description

This quiz explores the holistic concept of finance, focusing on established and evolving techniques for managing risk. It specifically highlights the open account trade system, where transactions are executed without banking support. Test your knowledge on these important financial mechanisms.