Compare and contrast the strategies in reducing the risks of international lending. (Total 10 marks)

 

Following strategies can be used to reduce the risk of international lending :-

1) Making use of financial instruments designed to hedge foreign exchange risks.

2) Matching the lending of the company to the borrowing.

3) Passing the cost to clients through local currency lending and charging a foreign exchange loss surcharge from them.

4) The company can also establish a reserve account.

5) Before lending funds to a foreign borrower, the lender must determine the credit worthiness of the borrower to know if timely repayment could be made by him.

6) The company can enter into a forward contract to protect against fluctuations in exchange rate.

Step-by-step explanation

Risks in international lending include the following.

• Risks associated with the creditworthiness of the borrower
•  Interest rate risk
• Clearing risk
• Foreign exchange risk.