11

Financing Foreign Financing Foreign TradeTrade

Chapter 15Chapter 15

22

International FinanceInternational Finance

is about is about

Risk MitigationRisk MitigationororRisk EngineeringRisk Engineering

33

Types of RiskTypes of Risk

Preshipment - Shipment - Preshipment - Shipment - PostshipmentPostshipment

44

The Trade Cycle and The Trade Cycle and RiskRisk

7

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

55Initial Contact

Contract

Production Process

Transport

To Port

Port Entry

Pre-shipment Risks

LOADINGSHIP

PORT

EXPORTCUSTOMS

66

Transport to PortTransport to Port

By rail mode

By air mode

By ground mode

77

THE PORTTHE PORT

88

99

LOADING THE SHIPLOADING THE SHIP

1010

1111

1212

Production Process

Transport

To Port

Port Entry

Ex Works FAS

INCOTERMS

EXPORTER’S LOADING DOCK

SHIP

FOB

1313

LOADEDSHIP

Ocean Freight is most common mode

of transport

PERILS OF THE SEA

Shipment Risks

PortOf

Departure

PortOf Arrival

1414

Shipment RisksShipment Risks

Perils of the SeaPerils of the Sea Engine TroubleEngine Trouble RammingRamming JettisonJettison Running AgroundRunning Aground

1515

Post-Shipment RiskPost-Shipment Risk

PortOf

Arrival

CUSTOMSIMPORTER’SWAREHOUSE

FINALPYMT

Transit to Importer

1616

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

1717

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

1818

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.

1919

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.

2020

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

2121

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

2222

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

2323

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

2424

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)

2525

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)

2626

PAYMENT TERMSPAYMENT TERMS

3.3. Types of DraftsTypes of Drafts

a.a. sightsight

b.b. timetime

2727

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

2828

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.

2929

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.

3030

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

3131

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

3232

A “Small” Container A “Small” Container ShipShip

3333

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.

3434

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.

3535

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

3636

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

3737

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)

3838

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.

3939

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

4040

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.

4141

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

4242

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

4343

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.

4444

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.