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Financing Foreign Trade - PowerPoint PPT Presentation


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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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Presentation Transcript
types of risk
Types of Risk
  • Preshipment - Shipment - Postshipment
slide5

Pre-shipment Risks

Port Entry

Contract

LOADING

SHIP

Transport

Production Process

To Port

PORT

EXPORT

CUSTOMS

Initial Contact

transport to port
Transport to Port

By ground mode

By rail mode

By air mode

slide12

INCOTERMS

EXPORTER’S LOADING

DOCK

Port Entry

SHIP

Transport

Production Process

To Port

Ex Works

FAS

FOB

slide13

Shipment Risks

Ocean Freight is

most common mode

of transport

LOADED

SHIP

PERILS OF THE SEA

Port

Of

Departure

Port

Of

Arrival

shipment risks
Shipment Risks
  • Perils of the Sea
  • Engine Trouble
  • Ramming
  • Jettison
  • Running Aground
post shipment risk
Post-Shipment Risk

IMPORTER’S

WAREHOUSE

CUSTOMS

Port

Of

Arrival

Transit to Importer

FINAL

PYMT

payment terms
PAYMENT TERMS

I. PAYMENT TERMS

A. Four Principal Means:

1. Cash in advance

2. Open Account

3. Letter of Credit

4. Drafts

payment terms17
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

payment terms18
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.

payment terms19
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.

payment terms20
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
payment terms21
PAYMENT TERMS

2. Advantages of an L/C to Exporter

a. eliminates credit risk and

b. pre-shipment risk of order cancellation

payment terms22
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

payment terms23
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

payment terms24
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)

payment terms25
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)

payment terms26
PAYMENT TERMS

3. Types of Drafts

a. sight

b. time

documents
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

documents28
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.

documents29
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.

incoterms
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

documents31
DOCUMENTS

D. INSURANCE

1. Marine Insurance-

same name whether ocean or air freight.

2. Insurance Certificate-

issued per trip to show proof of insurance

insurance principle general average
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.

example of general average liability assigned
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.

short term financing techniques
SHORT-TERMFINANCING TECHNIQUES

III. FINANCING TECHNIQUES

A. Four Types:

1. Bankers’ Acceptances

2. Discounting the draft

3. Factoring

4. Forfaiting

bankers acceptances
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

discounting
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)

factoring
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.

forfait
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

government sources
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.

government sources41
GOVERNMENT SOURCES

1. Ex-Im Bank Programs:

a. Direct loans to exporters

b Loan guarantees

c. Risk Insurance: Political and commercial insurance

government sources42
GOVERNMENT SOURCES
  • Ex-Im Restrictions:
      • At least 51% U.S. content
      • No armaments
      • Must be environmentally friendly to both countries
countertrade
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.

countertrade44
COUNTERTRADE

B. When to Use Countertrade

1. with “soft-currency” developing countries

2. when tariffs or quotas prevent

trade.