Question

List the major categories of financial risk that need to be considered in an international transaction....

List the major categories of financial risk that need to be considered in an international transaction. Explain each briefly

Homework Answers

Answer #1

The major financial risks in an international transaction can be as follows-

  1. Credit Risk- it takes place when the counter-party (say, the borrowers) default and fails to pay the required transaction amount.
  2. Foreign exchange rate risk- it occurs when there are fluctuations in the exchange rates of the two countries trading. The uncertainity of the exchange rates makes such transactions highly risky.
  3. Interest rate risk- it arises due to an fluctuation in the interest rates of the countries which changes the money supply of the country for a period of time.
  4. Liquidity risk- it occurs as a result of highly illiquid market.
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