Financing foreign trade
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Financing Foreign Trade. Chapter 15. International Finance is about Risk Mitigation or Risk Engineering. Types of Risk. Preshipment - Shipment - Postshipment. The Trade Cycle and Risk. Pre-shipment Risks. Port Entry. Contract. LOADING SHIP. Transport. Production Process. To Port.

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International finance is about risk mitigation or risk engineering l.jpg
International Financeis about Risk MitigationorRisk Engineering


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Types of Risk

  • Preshipment - Shipment - Postshipment



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Pre-shipment Risks

Port Entry

Contract

LOADING

SHIP

Transport

Production Process

To Port

PORT

EXPORT

CUSTOMS

Initial Contact


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Transport to Port

By ground mode

By rail mode

By air mode




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INCOTERMS

EXPORTER’S LOADING

DOCK

Port Entry

SHIP

Transport

Production Process

To Port

Ex Works

FAS

FOB


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Shipment Risks

Ocean Freight is

most common mode

of transport

LOADED

SHIP

PERILS OF THE SEA

Port

Of

Departure

Port

Of

Arrival


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Shipment Risks

  • Perils of the Sea

  • Engine Trouble

  • Ramming

  • Jettison

  • Running Aground


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Post-Shipment Risk

IMPORTER’S

WAREHOUSE

CUSTOMS

Port

Of

Arrival

Transit to Importer

FINAL

PYMT


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PAYMENT TERMS

I. PAYMENT TERMS

A. Four Principal Means:

1. Cash in advance

2. Open Account

3. Letter of Credit

4. Drafts


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PAYMENT TERMS

B. Cash in Advance

1. Minimal risk to exporter

2. Used where there is

a. Political unrest

b. Goods made to order

*c. New and unfamiliar customer


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PAYMENT TERMS

C. OPEN ACCOUNT

1. Creates a credit sale

2. To importer’s advantage

3. More popular lately because

a. major surge in global trade

b. credit information improved

c. more global familiarity with exporting.


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PAYMENT TERMS

4. Benefits of Open Accounts:

a. greater flexibility in making a trade

b. lower transactions costs

5. Major disadvantage:

-Slow payment

-highly vulnerable to government currency controls.


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PAYMENT TERMS

D. Letter of Credit (L/C)

1. A letter addressed to seller

a. written and signed by

buyer’s (importer) bank

b. promising to honor seller’s

(exporter) drafts.

c. Bank substitutes its own

commitment

*d. Seller must conform to terms

e. Protects in case of discrepancies

  • * Not an advantage to the exporter


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PAYMENT TERMS

2. Advantages of an L/C to Exporter

a. eliminates credit risk and

b. pre-shipment risk of order cancellation


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PAYMENT TERMS

3. Advantages of L/C to Importer

a. shipment by exporter assured

b. documents inspected ensure the correct order

c. may allow better sales terms


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PAYMENT TERMS

4. Safest type of L/Cs

a. documentary

includes bill of lading and commercial invoice

b. irrevocable

99% of the time

c. confirmed


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PAYMENT TERMS

E. DRAFTS

1. Definition:

- unconditional order in writing

- exporter’s order for importer to pay

- at once (sight draft) or

- in future (time draft)


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PAYMENT TERMS

2. Three Functions of Drafts

a. clear evidence of financial obligation

b. reduced financing costs

c. Can be a financial product for investors

(i.e. A time draft may be converted to a banker’s acceptance)


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PAYMENT TERMS

3. Types of Drafts

a. sight

b. time


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DOCUMENTS

II. DOCUMENTS USED IN INT’L TRADE

A. Three most used documents

1. Bill of Lading (most important)

2. Commercial Invoice

3. Insurance Certificate


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DOCUMENTS

B. Bill of Lading

Three functions:

1. Acts as a contract to carry the goods.

2. Acts as a shipper’s receipt

3. Establishes ownership over goods if negotiable type.


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DOCUMENTS

C. COMMERCIAL INVOICE

Purpose:

1. Lists full details of goods shipped with INCOTERMS

2. Names of importer/exporter given

3. Identifies payment terms in a specific currency

4. List charges for transport and insurance.


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INCOTERMS

A codification of international rules for the uniform interpretation of common contract clauses in export/import transactions.

EXW: at exporter’s warehouse; importer has most liability

FAS: along side the ship

FOB: after shipment is loaded on

board

DDP: Delivered duty paid - exporter has most liability


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DOCUMENTS

D. INSURANCE

1. Marine Insurance-

same name whether ocean or air freight.

2. Insurance Certificate-

issued per trip to show proof of insurance



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Insurance Principle: GENERAL AVERAGE

An ocean marine loss that occurs through the voluntary sacrifice of a part of the vessel or cargo, or an expenditure, to safeguard the vessel and its remaining cargo from a common peril.

If the sacrifice is successful, all interests at risk contribute to the loss borne by owner of the sacrificed property based on their respective saved values.

A party can insure their portion of such a loss under an ocean marine policy.


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Example of General AverageLiability Assigned

If only shipper A’s container is jettisoned at a loss of $250,000, what is shipper B and C liable for?

Total

Co. Containers % Value Liability

A 1 5 $250,000 0

B 4 20 $20,000 $50,000

C 15 75 $150,000 $187,500

Total: 20 containers at risk when ship set sail.


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SHORT-TERMFINANCING TECHNIQUES

III. FINANCING TECHNIQUES

A. Four Types:

1. Bankers’ Acceptances

2. Discounting the draft

3. Factoring

4. Forfaiting


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BANKERS’ ACCEPTANCES

1. Bank created acceptances

a. Creation: Time drafts accepted by bank

b. Terms: Payable at maturity to holder

c. Sale in the money market: Bankers acceptance

d. Highly liquid market


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DISCOUNTING

2. Discounting

a. Converts exporters’ time drafts to cash

minus interest to maturity and

commissions.

b. Low cost financing with few fees

c. May be:

with recourse (exporter still liable) or

without recourse(bank takes

liability for nonpayment)


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FACTORING

3. Factoring

firms sell accounts receivable to another firm known as the factor.

a. Discount charged by factor

b. Non-recourse basis: Factor

assumes all payment risk.

c. When used:

1.) Occasional exporting

2.) Clients geographically dispersed.


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FORFAIT

4. Forfaiting

a. Definition:

discounting at a fixed rate without recourse for medium- term accounts receivable

b. Use: Large capital purchases

c. Most popular in W. Europe


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GOVERNMENT SOURCES

IV. GOVERNMENT SOURCES OF EXPORT

FINANCING AND CREDIT INSURANCE

A. Export-Import Bank of the U.S.

-known as Ex-Im Bank

-finances and facilitates U.S. exports only.


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GOVERNMENT SOURCES

1. Ex-Im Bank Programs:

a. Direct loans to exporters

b Loan guarantees

c. Risk Insurance: Political and commercial insurance


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GOVERNMENT SOURCES

  • Ex-Im Restrictions:

    • At least 51% U.S. content

    • No armaments

    • Must be environmentally friendly to both countries


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COUNTERTRADE

V. COUNTERTRADE

A. Three Specific Forms:

1. Barter

direct exchange in kind

2. Counterpurchase

sale/purchase of unrelated

goods but with currencies

3. Buyback

repayment of original purchase through sale of a related product.


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COUNTERTRADE

B. When to Use Countertrade

1. with “soft-currency” developing countries

2. when tariffs or quotas prevent

trade.


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