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Managing financial risks across borders can be chaotic.

Managing Financial Risks Across Borders Can Be Chaotic

When goods or services cross borders, risk managers should abide by the Italian expression, "We are living in a moment of ordinary madness," according to Virginio Tavecchio, senior manager, international division, treasury and foreign exchange for Banca Commerciale Italiana in Milan.

Other panelists in a session on managing financial and political risks put forth a like picture of "ordinary madness," especially when dealing with importing and exporting goods, or currency swaps, interest rates, futures contracts and other financial transactions.

Risk managers should first understand the risks involved, how significant they are to their companies and how to control them with the resources available, said Mr. Tavecchio. When it is a question of purely financial risks such as foreign exchange risks or interest rate risks, "Active risk management is of paramount importance and is usually reported by a large body of mathematical and computer models," he added.

One area of increasing concern to companies is exporting. "Export is not only a political issue, it has become of vital interest to companies," said Dominique Japy, chairman of Assurances and Credit in Paris "Most European countries have long recognized the need to provide their national exporters with insurance coverage."

He said export insurance comes into force when the buyer's country prevents, restricts or delays payment to the insured exporter after the goods have been received. But he added that there may be the case of restrictions, cancellation or non-renewal of an export license which prevents the export of goods or services.

Mr. Japy said underwriters consider such factors as previous experience, length of time needed for protection, volume of the client's business. They also expect the client to disclose its knowledge of all relevant and pertinent facts related to the transaction.

This market, Mr. Japy said, can be best characterized by a lack of capacity. He said there is no guarantee, in fact, for a given capacity to last. "Quotations normally hold for a few days, sometimes for a few weeks," he said. "Particularly, if the risk is to be covered in tricky countries. We saw that, for instance, with the upheavals in China, which triggered a flood of requests. Hoards of people acted under conditions of duress. But if all those requests had materialized, capacity for them would not have been obtained.

Although he said one option to ensure coverage and to have guaranteed capacity is to pay a commitment fee, which is paid in advance and guarantees a certain capacity for certain dates.

But he also said that there is always the danger that if profits go down, as in the case of the aviation market, then capacity will be channelled to more profitable types of insurance.

PHOTO : Enrico Gladulich of Luxembourg's Electrolux moderates a financial and political risk

PHOTO : session.
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Author:Oshins, Alice H.
Publication:Risk Management
Date:Dec 1, 1989
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