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  • 10.1.1-RISK AND THE RELATION TO TRADE CREDIT-TYPES OF RISK

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  • Types of risk

     
     
    In terms of the coffee and general commodity trade, risk can be divided into four main categories:

    Physical and security risk
    : physical loss or damage as well as theft and fraud, to be covered by insurance against payment of a premium. See also 05.05, Insurance.

    Quality or value risk: the goods are not what they are supposed to be - at worst they are unsaleable.

    Price or market risk: the price of goods may rise or fall to the detriment of the owner, depending on the type of transaction they have engaged in. The value of unsold stocks falls when prices decline - conversely the cost of covering (buying in against) a short or forward sale increases when prices rise.

    Performance risk: one of the parties to a transaction does not fulfil its obligations, for example because of short supply or unexpected price movements, resulting in loss for the other party. A seller does not deliver, delivers late, or delivers the wrong quality. A buyer does not take up the documents, becomes insolvent or simply refuses to pay. In some countries this particular type of non-performance risk is also known as Delcredere risk.

    Some trade aspects and terminology require a brief explanation: go to 10.01.02.