W8 “Final Exam”

Question 1

Incoterms have undergone a series of evolution through different versions since 1919. The first version comprised of FOB, Ex ship, FAS, Ex quay, CIF, and C&F and it focused on maritime transport. The second version included Free no Truck, FOT, Delivered Costs Paid, DCP, and Free on Rail, FOR terms. The third version was implemented in 1967 to address the issues of misinterpretations that existed in the previous terms. It comprised of delivery at frontier, DAF, and delivery at the destination, DPP terms. The fourth version came as a result of air transportation advances, and it incorporated a new condition Free on Board, FOB Airport. The fifth version emerged around 1980, and it included the term Free Carrier FRC at a certain point. The sixth version appeared in 1990. It considered the use of the general term Free Carrier, FCA, at any point. The seventh version came in 2000, and it incorporated modification on sections of FAS and DEQ Incoterms. It addressed the issues of exporter and importer record. The eighth version, the current version, was published in 2010, and it encompasses a consolidated version of D-family rules.

Question 2

Commercial risks are risks that an organization’s debtors will not pay it because of their deteriorating financial position or declared or suspected insolvency. Examples of commercial risks include bankruptcy, insolvency, non-payment due to currency depreciation, and protracted default. On the other hand, political risks are related to any events that may apply as a force majeure for an organization’s customers operating in other countries, rendering them unable to pay their debts. They incorporate political events such as rebellion, war or revolution; natural disasters; economic difficulties such as shortage of currency, and government actions, negligence, or decisions.

Question 3

Foreign exchange rates refer to the prices of domestic currency stated in terms of another currency. They compare one currency with another to depict their relative values. Since the relative value of different currencies varies over time due to changes in demand, supply, and customer confidence, foreign exchange rates also change. This has a significant impact on international trade in terms of competitiveness in the global market. For instance, when exchange rates increase, it signifies depreciation in national currency, and this entrains a reduction in the export’s volume. On the other hand, price rises changed by accession reveals an increase in exports. An increase in imports always accompanies the increase in exports.

Question 4

An organization can manage its export risks by using mitigation, acceptance, transfer, and avoidance management strategies.  Risk mitigation strategies involve situations where an organization demands its customers to make advance payments. This includes setting credit limits and adjusting them based on customers’ payment performance. Risk avoidance strategy is where an exporter avoids export risks by avoiding entrance into markets experiencing political volatility or cutting off provisions to clients whose payment culture is poor. Risk transfer management strategy encompasses insuring against export risks. Risk acceptance management strategy entails situations where an organization decides to bear the risk of payment default itself.

Question 5

Non-tariff Barriers, NTBs is a term used to present limitations that upshot from conditions, exclusions, or market needs that make exportation or importation of goods or services difficult or expensive. They may also incorporate the unwarranted and inappropriate usage of Non-Tariff Measures, NTMs on trade including phytosanitary and sanitary measures and other technical barriers. States use NTBs as measures towards protecting domestic businesses from unnecessary foreign competition. Countries also employ NTBs in foreign trade based on the accessibility of products and political agreements with trading states. Besides, countries use NTBs whenever they want to manage the amount of business they carry out with foreign countries. Examples of NTBs include import bans, quotas, embargoes, sanctions, and levies.