1 financing foreign trade chapter 15. 2 international finance is about risk mitigation or risk...
TRANSCRIPT
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Financing Foreign Financing Foreign TradeTrade
Chapter 15Chapter 15
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International FinanceInternational Finance
is about is about
Risk MitigationRisk MitigationororRisk EngineeringRisk Engineering
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Types of RiskTypes of Risk
Preshipment - Shipment - Preshipment - Shipment - PostshipmentPostshipment
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The Trade Cycle and The Trade Cycle and RiskRisk
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The Trade Cycle
The Transaction over Time
Contract
Production
Land Transport
Port of Departure Sea Transport
Port of Destination
Customs!
Land Transport and Delivery
Final Payment
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55Initial Contact
Contract
Production Process
Transport
To Port
Port Entry
Pre-shipment Risks
LOADINGSHIP
PORT
EXPORTCUSTOMS
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Transport to PortTransport to Port
By rail mode
By air mode
By ground mode
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THE PORTTHE PORT
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LOADING THE SHIPLOADING THE SHIP
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Production Process
Transport
To Port
Port Entry
Ex Works FAS
INCOTERMS
EXPORTER’S LOADING DOCK
SHIP
FOB
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LOADEDSHIP
Ocean Freight is most common mode
of transport
PERILS OF THE SEA
Shipment Risks
PortOf
Departure
PortOf Arrival
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Shipment RisksShipment Risks
Perils of the SeaPerils of the Sea Engine TroubleEngine Trouble RammingRamming JettisonJettison Running AgroundRunning Aground
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Post-Shipment RiskPost-Shipment Risk
PortOf
Arrival
CUSTOMSIMPORTER’SWAREHOUSE
FINALPYMT
Transit to Importer
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PAYMENT TERMSPAYMENT TERMS
I.I. PAYMENT TERMSPAYMENT TERMS
A.A. Four Principal Means:Four Principal Means:
1.1. Cash in advanceCash in advance
2.2. Open Account Open Account
3.3. Letter of Credit Letter of Credit
4.4. DraftsDrafts
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PAYMENT TERMSPAYMENT TERMS
B.B. Cash in AdvanceCash in Advance
1.1. Minimal risk to exporterMinimal risk to exporter
2.2. Used where there isUsed where there is
a. a. Political unrestPolitical unrest
b.b. Goods made to orderGoods made to order
*c.*c. New and unfamiliar New and unfamiliar customercustomer
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PAYMENT TERMSPAYMENT TERMS
C.C. OPEN ACCOUNTOPEN ACCOUNT
1.1. Creates a credit saleCreates a credit sale
2.2. To importer’s advantageTo importer’s advantage
3.3. More popular lately becauseMore popular lately because
a.a. major surge in global trademajor surge in global trade
b.b. credit information credit information improvedimproved
c.c. more global familiarity with more global familiarity with exporting.exporting.
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PAYMENT TERMSPAYMENT TERMS
4.4. Benefits of Open Accounts:Benefits of Open Accounts:
a.a. greater flexibility in greater flexibility in making a trademaking a trade
b.b. lower transactions costslower transactions costs
5.5. Major disadvantage:Major disadvantage:
-Slow payment-Slow payment
-highly vulnerable to -highly vulnerable to government currency controls.government currency controls.
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PAYMENT TERMSPAYMENT TERMS
D.D. Letter of Credit (L/C)Letter of Credit (L/C)1.1. A letter addressed to sellerA letter addressed to seller
a.a. written and signed by written and signed by buyer’s (importer) bankbuyer’s (importer) bank
b.b. promising to honor seller’spromising to honor seller’s(exporter) drafts. (exporter) drafts.
c.c. Bank substitutes its ownBank substitutes its owncommitmentcommitment
*d.*d. Seller must conform to termsSeller must conform to termse.e. Protects in case of Protects in case of
discrepanciesdiscrepancies
* Not an advantage to the exporter* Not an advantage to the exporter
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PAYMENT TERMSPAYMENT TERMS
2.2. Advantages of an L/C to Advantages of an L/C to ExporterExporter
a.a. eliminates credit risk andeliminates credit risk and
b.b. pre-shipment risk of pre-shipment risk of order order cancellationcancellation
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PAYMENT TERMSPAYMENT TERMS
3.3. Advantages of L/C to ImporterAdvantages of L/C to Importer
a.a. shipment by exporter assuredshipment by exporter assured
b.b. documents inspected ensure documents inspected ensure the correct orderthe correct order
c.c. may allow better sales termsmay allow better sales terms
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PAYMENT TERMSPAYMENT TERMS
4.4. Safest type of L/CsSafest type of L/Cs
a.a. documentarydocumentaryincludes bill of lading and commercial includes bill of lading and commercial invoiceinvoice
b.b. irrevocableirrevocable99% of the time99% of the time
c.c. confirmedconfirmed
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PAYMENT TERMSPAYMENT TERMS
E. E. DRAFTSDRAFTS
1.1. Definition:Definition:
- unconditional order in - unconditional order in writingwriting
- exporter’s order for - exporter’s order for importer importer to pay to pay
- at once (sight draft) or- at once (sight draft) or
- in future (time draft)- in future (time draft)
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PAYMENT TERMSPAYMENT TERMS
2.2. Three Functions of DraftsThree Functions of Draftsa.a. clear evidence of financial clear evidence of financial
obligationobligationb.b. reduced financing costsreduced financing costsc.c. Can be a financial product for Can be a financial product for
investorsinvestors(i.e. A time draft may be (i.e. A time draft may be
converted to a converted to a banker’s banker’s acceptance)acceptance)
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PAYMENT TERMSPAYMENT TERMS
3.3. Types of DraftsTypes of Drafts
a.a. sightsight
b.b. timetime
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DOCUMENTSDOCUMENTS
II.II. DOCUMENTS USED IN INT’L DOCUMENTS USED IN INT’L TRADETRADE
A.A. Three most used documentsThree most used documents
1. Bill of Lading (most 1. Bill of Lading (most important)important)
2. Commercial Invoice2. Commercial Invoice
3. Insurance Certificate3. Insurance Certificate
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DOCUMENTSDOCUMENTS
B.B. Bill of LadingBill of Lading
Three functions:Three functions:
1.1. Acts as a contract to Acts as a contract to carry the goods.carry the goods.
2.2. Acts as a shipper’s Acts as a shipper’s receiptreceipt
3. 3. Establishes ownership Establishes ownership overovergoods if goods if
negotiable negotiable type.type.
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DOCUMENTSDOCUMENTS
C.C. COMMERCIAL INVOICECOMMERCIAL INVOICE
Purpose:Purpose:
1.1. Lists full details of goods Lists full details of goods shipped with INCOTERMSshipped with INCOTERMS
2.2. Names of importer/exporter Names of importer/exporter givengiven
3.3. Identifies payment terms in a Identifies payment terms in a specific currencyspecific currency
4.4. List charges for transport and List charges for transport and insurance.insurance.
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INCOTERMSINCOTERMS
A codification of international rules for the A codification of international rules for the uniform interpretation of common contract uniform interpretation of common contract clauses in export/import transactions.clauses in export/import transactions.
EXW:EXW: at exporter’s warehouse; importer has at exporter’s warehouse; importer has most most liability liability
FAS:FAS: along side the ship along side the ship
FOB:FOB: after shipment is loaded onafter shipment is loaded on
boardboard
DDP:DDP: Delivered duty paid - exporter has most Delivered duty paid - exporter has most liabilityliability
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DOCUMENTSDOCUMENTS
D.D. INSURANCEINSURANCE
1.1. Marine Insurance-Marine Insurance-
same name whether ocean or same name whether ocean or air air freight.freight.
2.2. Insurance Certificate-Insurance Certificate-
issued per trip to show proof of issued per trip to show proof of insuranceinsurance
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A “Small” Container A “Small” Container ShipShip
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Insurance Principle: Insurance Principle: GENERAL AVERAGEGENERAL AVERAGE
An ocean marine loss that occurs through An ocean marine loss that occurs through the voluntary sacrifice of a part of the vessel the voluntary sacrifice of a part of the vessel or cargo, or an expenditure, to safeguard the or cargo, or an expenditure, to safeguard the vessel and its remaining cargo from a vessel and its remaining cargo from a common peril. common peril.
If the sacrifice is successful, If the sacrifice is successful, all interests at risk all interests at risk contributecontribute to the loss borne by owner of the to the loss borne by owner of the sacrificed property based on their respective sacrificed property based on their respective saved values. saved values.
A party can insure their portionA party can insure their portion of such a of such a loss under an ocean marine policy.loss under an ocean marine policy.
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Example of General Example of General AverageAverageLiability AssignedLiability Assigned
If only shipper A’s container is jettisoned at a loss If only shipper A’s container is jettisoned at a loss of $250,000, what is shipper B and C liable for?of $250,000, what is shipper B and C liable for?
TotalTotal
Co.Co. ContainersContainers % % ValueValue LiabilityLiability
AA 1 1 5 5 $250,000$250,000 00
BB 4 4 2020 $20,000 $20,000 $50,000$50,000
CC 15 15 7575 $150,000$150,000 $187,500$187,500
Total: 20 containers at risk when ship set sail.Total: 20 containers at risk when ship set sail.
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SHORT-TERMSHORT-TERM FINANCING FINANCING TECHNIQUESTECHNIQUESIII.III. FINANCING TECHNIQUESFINANCING TECHNIQUES
A.A. Four Types:Four Types:
1.1. Bankers’ AcceptancesBankers’ Acceptances
2.2. Discounting the draftDiscounting the draft
3.3. FactoringFactoring
4.4. ForfaitingForfaiting
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BANKERS’ BANKERS’ ACCEPTANCESACCEPTANCES
1. Bank created acceptances1. Bank created acceptances
a. Creation: a. Creation: TimeTime drafts drafts accepted by bankaccepted by bank
b. Terms: Payable at b. Terms: Payable at maturity to holder maturity to holder
c. Sale in the money market: c. Sale in the money market: Bankers acceptanceBankers acceptance
d. Highly liquid marketd. Highly liquid market
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DISCOUNTINGDISCOUNTING
2.2. Discounting Discountinga.a. Converts exporters’ time drafts Converts exporters’ time drafts
to to cashcashminus interest to maturity and minus interest to maturity and commissions.commissions.
b.b. Low cost financing with few feesLow cost financing with few feesc.c. May be:May be:
with recourse (exporter still with recourse (exporter still liable) liable) or or
without recourse(bank takeswithout recourse(bank takesliability for nonpayment)liability for nonpayment)
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FACTORINGFACTORING
3.3. FactoringFactoringfirms sell accounts receivable to firms sell accounts receivable to another firm known as the factor.another firm known as the factor.a.a. Discount charged by factorDiscount charged by factorb.b. Non-recourse basis: FactorNon-recourse basis: Factorassumes all payment risk.assumes all payment risk.c.c. When used:When used:1.)1.) Occasional exportingOccasional exporting2.)2.) Clients geographically Clients geographically dispersed.dispersed.
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FORFAITFORFAIT
4.4. ForfaitingForfaiting
a.a. Definition:Definition:
discounting at a fixed rate discounting at a fixed rate without recourse for without recourse for
medium-medium- term accounts term accounts receivable receivable
b.b. Use: Large capital purchasesUse: Large capital purchases
c.c. Most popular in W. EuropeMost popular in W. Europe
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GOVERNMENT GOVERNMENT SOURCESSOURCESIV.IV. GOVERNMENT SOURCES OF EXPORTGOVERNMENT SOURCES OF EXPORT
FINANCING AND CREDIT FINANCING AND CREDIT INSURANCEINSURANCE
A.A. Export-Import Bank of the Export-Import Bank of the U.S.U.S.
-known as Ex-Im Bank-known as Ex-Im Bank
--finances and facilitates U.S. finances and facilitates U.S. exports only. exports only.
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GOVERNMENT GOVERNMENT SOURCESSOURCES
1.1. Ex-Im Bank Programs:Ex-Im Bank Programs:
a.a. Direct loans to exportersDirect loans to exporters
bb Loan guaranteesLoan guarantees
c.c. Risk Insurance: Political Risk Insurance: Political and and commercial commercial insuranceinsurance
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GOVERNMENT GOVERNMENT SOURCESSOURCES
2.2. Ex-Im Restrictions:Ex-Im Restrictions: At least 51% U.S. contentAt least 51% U.S. content No armamentsNo armaments Must be environmentally friendly to Must be environmentally friendly to
both countriesboth countries
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COUNTERTRADECOUNTERTRADEV.V. COUNTERTRADECOUNTERTRADE
A.A. Three Specific Forms:Three Specific Forms:1.1. BarterBarter
direct exchange in kinddirect exchange in kind2.2. CounterpurchaseCounterpurchase
sale/purchase of unrelatedsale/purchase of unrelatedgoods but with currenciesgoods but with currencies
3.3. BuybackBuybackrepayment of original repayment of original purchase through sale of a purchase through sale of a related product.related product.
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COUNTERTRADECOUNTERTRADE
B.B. When to Use CountertradeWhen to Use Countertrade
1.1. with “soft-currency” with “soft-currency” developing countriesdeveloping countries
2.2. when tariffs or quotas when tariffs or quotas prevent prevent
trade.trade.