Question

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

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.