Introduction
International trade is always associated with risks for both importers and exporters, especially when the trading partners are located far from one another (Niepmann & Schmidt-Eisenlohr, 2017). This paper provides a study of a given trading situation of American and Belgian traders and advises the possible solution to the importer.
Studying the Situation
To advise on the trading situation, it is essential to examine all the risks and the possible benefit for the importer. It is important for the American importer to make a profit from sales its priority. The €500,000 it owes the Belgian company is expected to be paid timely, so the importer cannot defer this payment and wait for the better currency value. According to Hoefele, Schmidt‐Eisenlohr. Moreover, and Yu (2016), only a bad trader breaks a contract when it is more profitable than its fulfillment. So, it is necessary to advise the American company to focus on gaining profits from its sales. However, such decision will put the company at risk, because if the dollar weakens during the identified period, the importer will take losses if its sales plan is not achieved. Nevertheless, the American company is to pay in euros, which means that the possible losses will be insignificant.
If the dollar strengthens instead of weakening, it is crucial for the importer to monitor the euro’s position, since the weakening of one currency can cause the strengthening of another. However, the company can gain profit from this situation too. In this case, it will have to seek the help of financial intermediaries to mitigate the risks (Niepmann & Schmidt-Eisenlohr, 2017).
In conclusion, the American company should be focused on gaining profit from its sales. It will help the importer eliminate the risks and fulfill the contract.
References
Hoefele, A., Schmidt‐Eisenlohr, T., & Yu, Z. (2016). Payment choice in international trade: Theory and evidence from cross‐country firm‐level data. Canadian Journal of Economics/Revue canadienne d’économique, 49(1), 296-319.
Niepmann, F., & Schmidt-Eisenlohr, T. (2017). International trade, risk and the role of banks. Journal of International Economics, 107, 111-126.