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.
By ground mode
By rail mode
By air mode
Ocean Freight is
most common mode
PERILS OF THE SEA
Transit to Importer
I. PAYMENT TERMS
A. Four Principal Means:
1. Cash in advance
2. Open Account
3. Letter of Credit
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
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.
4. Benefits of Open Accounts:
a. greater flexibility in making a trade
b. lower transactions costs
5. Major disadvantage:
-highly vulnerable to government currency controls.
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
c. Bank substitutes its own
*d. Seller must conform to terms
e. Protects in case of discrepancies
2. Advantages of an L/C to Exporter
a. eliminates credit risk and
b. pre-shipment risk of order cancellation
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
4. Safest type of L/Cs
includes bill of lading and commercial invoice
99% of the time
- unconditional order in writing
- exporter’s order for importer to pay
- at once (sight draft) or
- in future (time draft)
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)
3. Types of Drafts
II. DOCUMENTS USED IN INT’L TRADE
A. Three most used documents
1. Bill of Lading (most important)
2. Commercial Invoice
3. Insurance Certificate
B. Bill of Lading
1. Acts as a contract to carry the goods.
2. Acts as a shipper’s receipt
3. Establishes ownership over goods if negotiable type.
C. COMMERCIAL INVOICE
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.
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
DDP: Delivered duty paid - exporter has most liability
1. Marine Insurance-
same name whether ocean or air freight.
2. Insurance Certificate-
issued per trip to show proof of insurance
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.
If only shipper A’s container is jettisoned at a loss of $250,000, what is shipper B and C liable for?
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.
III. FINANCING TECHNIQUES
A. Four Types:
1. Bankers’ Acceptances
2. Discounting the draft
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
a. Converts exporters’ time drafts to cash
minus interest to maturity and
b. Low cost financing with few fees
c. May be:
with recourse (exporter still liable) or
without recourse(bank takes
liability for nonpayment)
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.
discounting at a fixed rate without recourse for medium- term accounts receivable
b. Use: Large capital purchases
c. Most popular in W. Europe
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.
1. Ex-Im Bank Programs:
a. Direct loans to exporters
b Loan guarantees
c. Risk Insurance: Political and commercial insurance
A. Three Specific Forms:
direct exchange in kind
sale/purchase of unrelated
goods but with currencies
repayment of original purchase through sale of a related product.
B. When to Use Countertrade
1. with “soft-currency” developing countries
2. when tariffs or quotas prevent