INTERNATIONAL FINANCE

International Finance and Financial Management



International Finance and Financial Management

Section A

Price risk, in the narrow sense means the risk of unfavorable changes in prices of materials and raw materials consumed by individual companies or products and services they sell. Adverse changes in these prices (an increase of prices of products and services purchased by the company and the decline in prices of products and services sold) cause specific consequences for production costs, revenues, profits, and ultimately also for goodwill. While price is one element of the contract, but it focuses on the business results across the whole market. It applies equally to importers and exporters are different and the consequences that entails. In export setting too low a price means worsening of the effectiveness of the transaction (Jordan & Miller, 2008, 15). Sometimes the low price the buyer is associated with poor quality goods, which paradoxically may lead to the phenomenon where lower prices lead to lower demand. Moreover, in countries where there is a market economy, including in countries, too low price may be deemed a dumped price brings with it the risk of complaints.

Characteristic of foreign trade is a lapse of time between the time of the transaction and the timing of its implementation. To avoid problems that may pose a phenomenon it is possible to determine the price fix, which involves both parties, no matter at what level will shape the market price at the time of payment. Intermediate solution is to place a revision clause in the contract price, to modify it in case the price of the basic components exceeds a certain level. In connection with the passage of time between the date of the conclusion and execution of the contract term price risk is closely related to the previously described exchange rate and currency risk.

The price risk is also related to the concept of the risk of lending money. Theoretically, should not differ from the cash price, because it should be covered by the cost of credit. In practice, however, it is usually higher than the cash price. This can be explained by the fact that the capital involved in the production or marketing of goods seems to produce more profit than the same capital located in the bank (Lintner, 2005, 13). The second reason for this is the risk of the failure to comply with payment obligations. In many countries it is possible to cover the risk of lending money through export credit insurance.

Controlling Price Risk

It is a combination of classification used in the documents of the Commission on Trade and Development United Nations (UNCTAD), and the classification used in the documents of the International Working Group on Risk Management Commodities World Bank. All methods of price risk management can be divided into traditional and market. The traditional methods include: the creation of commodity reserves and cash funds, long-term contracts with suppliers and customers, business diversification, as well as receive subsidies from the government in the event of adverse price movements ...