Analysis and Prevention Investment Risks in International Trade

Yu+Jian

1.Introduction

Nowadays with the rapid development of China and its opening widely up more and more to the World， A lot of companies in China want to expand the foreign business and explore the International Market in the way of making investments in Abroad. The measuring and managing investment risk is necessary to be put into a deliberate consideration in making decisions in advance. Take one US Company for an example. The corporation in U.S. registered multinational mining company with an annual turnover of $0.4 billion， wants to study the possibility of entering in the African mining market （gold sector） through an investment project in South Africa to expand its international trade. But this investment opportunity will lead to some kinds of risks to the company. To discover all the sorts of risks underlying the investment project and to find the methods to manage these risks is a job of risk officer to be considered about. The risk management report will indicate the recent South Africas political and economic environment， expect the future evolution of country risk which can affect the value of the project and present the possible solutions to mitigate each type of risk.

2.Risks underlying investment project

Market risk

The U.S. Company is likely to suffer market risk when enter in the African mining market. Market risk is the risk that the value of a portfolio will decrease due to the change in value of the market risk factors. In general， the main four factors of risk in standard market are foreign exchange rates， interest rates， stock prices and commodity prices.

Exchange rate risk is a form of financial risk that arises from the potential change in the exchange rate of one currency against another. The projects product is planned to be exported to the UK with sales contract set in pound sterling. The exchange rate used in exports is $1.4500/￡. If the direct exchange rate declines， US Company will use the same amount of GBP （Great Britain Pound）to exchange less USD （USA dollar）namely the decrease of corporation earnings. If the interest rate goes up， the company will spend more money to pay off the loan， which is a bad news for the enterprise. Interest rate risk is the risk （variability in value） borne by an interest-bearing asset， such as a loan， due to variability of interest rates.

As we know the companys profit is affected greatly by the gold price. The company will earn as well as loss more money， as the gold price increases and decreases. Therefore， there is commodity price risk underlying the investment project. Commodity price will depend mostly on the uncertainties of future market values and the size of the future income of the company will be caused by the fluctuation in the prices of commodities.

Credit risk

The mining companys output is planned to be exported to the UK with sales contract. Hence， the company may be suffered default and counterpart settlement risk. If the mining company has delivered the gold to the counterparty， but the counterparty default to pay the money， the mining company will face the financial difficulties.

The mining company may be faced with the large losses， because the entire amount of the payment between counterparties may be at risk if the UK enterprise fails during the settlement process. If the mining corporation has spent a huge cost to produce the products， but the counterparty cancelled the contract or didnt fulfill its obligations under the terms of agreement or bankrupt before the transaction date， the counterparty will suffer the pre-settlement risk.

3.Analysis of country risk

Political environment

The political climates factor components are domestic conflict， international relations and political system， government. Recent years have seen many regions of Africa involved in war and internal or external conflict. Due to conflicts， there are over 9 million refugees and internally displaced people in Africa. A lot of people have been slaughtered due to the large amount of conflicts and civil wars. During recent five years， a wave of protests has erupted throughout the North Africa and Middle East， which are a combination of the rising costs of living， high unemployment and global financial crisis.

Economic environment

African economy consists of the trade， industry and human resource in Africa. The trade total volume of Africa occupies only 1% in global trade volume. The large population， which occupies 15% of worlds population， is the reason why Africas economy is depressed. The bad economic environment leads to more uncertain factors which enhance the country risk to the MNC （Multinational Corporation）who wants to invest project in Africa market.

Because of Africa is the most poor continent， the government hasnt enough money to construct some infrastructure that limits the development of industry and company. The government also hasnt sufficient fund to develop its education， so most of nationals havent the skill and technology. Most of mining companies havent skill to process the mine and they just export the materials to the World.

4.Expectations for future country risk variables

As a multinational mining enterprise， the factors contributing to country risk have far reaching effects on it. Its earnings and financial performance are adversely affected by the uncertainties and big events in the political climate， economic environment， the social institution and financial condition of the domestic country. Although Africa is a very poor and unrest continent， but the economic situation of Africa turns to good. Many international companies are more interested in Africa modern economy， especially during the period of the African economy keeping the high speed of growth. Recently， Africa has more frequent international trade with other countries， such as Japan， China and USA. From 2001 to 2010， the trade between Africa and China has increased ten times. It means a good sign of African economy and development， which reflects that the government has the willing to promote trade with other countries. This is beneficial for a MNC invest in Africa. On the political aspect， in recent years， many African governments start to work on their economic development. Africa has moved towards modernization through the increase of information exchange with other countries. Most of African countries have become liberalized and democratic politically. Africa tries to get rid of its old styles and to be more modernized in most aspects of politics. In the end， grassroots political action is to be a force in most African countries. Besides， mass participation， a free press and human rights turn into more and more widespread. All of these promote the harmonious of African politics and society development that can reduce the country risk for MNC.

5.Conclusion

These risks of investment in the international trade have defined and discussed most of risks underlying the investment project and have presented the possible methods to mitigate all the risks. The economic environment， political environment and country risk of Africa also have been described. If the investment cast in the project that is worth more than cost， the bosss intuition is that it might be sensible to go ahead with the investment. Besides， most of risks have been discovered and each risk has corresponding methods to mitigate. So this project is worthy of investing.

Reference：

Chittenden， M.， 2011. Africa political crisis. The Guardian， 15 Nov. p.2c.

Wikipedia， （2012）. List of African countries by GDP. [online] Available at：< http：//en.wikipedia.org/wiki/List_of_African_countries_by_GDP_（nominal） > [Accessed 6 April 2016].

Wikipedia， the free encyclopedia [online] at：< https：//en.wikipedia.org/wiki/Economy_of_Africa > [Accessed 6 April 2016].

Wikipedia， （2012）. Market risk. [online] Available at：< http：//en.wikipedia.org/wiki/Market_risk > [Accessed 6 April 2016].