Ch03-VersC.ppt

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Financing International Trade

_{Financing International Trade}

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Chapter Objectives

• _{To describe the methods of}

payment for international trade;

• _{To explain common trade finance methods;}

and

• _{To describe the major agencies that facilitate}

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Payment Methods

for International Trade

• _{In any international trade transaction, credit is}

provided by either

– _{the supplier (exporter),} – _{the buyer (importer),}

– _{one or more financial institutions, or} – _{any combination of the above.}

• _{The form of credit whereby the supplier funds}

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Payment Methods

for International Trade

Method  : Prepayments

• _{The goods will not be shipped until the buyer}

has paid the seller.

• _{Time of payment}_{: Before shipment}

• _{Goods available to buyers}_{: After payment} • _{Risk to exporter}_{: None}

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Payment Methods

for International Trade

Method  : Letters of credit (L/C)

• _{These are issued by a bank on behalf of the}

importer promising to pay the exporter upon presentation of the shipping documents.

• _{Time of payment}_{: When shipment is made} • _{Goods available to buyers}_{: After payment} • _{Risk to exporter}_{: Very little or none}

• _{Risk to importer}_{: Relies on exporter to ship}

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Payment Methods

for International Trade

Method  : Drafts (Bills of Exchange)

• _{These are unconditional promises drawn by}

the exporter instructing the buyer to pay the face amount of the drafts.

• Banks on both ends usually act as

intermediaries in the processing of shipping documents and the collection of payment. In banking terminology, the transactions are

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Payment Methods

for International Trade

• _{Time of payment}_{: On presentation of draft} • _{Goods available to buyers}_{: After payment} • _{Risk to exporter}_{: Disposal of unpaid goods} • _{Risk to importer}_{: Relies on exporter to ship}

goods as described in documents

Method  : Drafts (Bills of Exchange)

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Payment Methods

for International Trade

• _{Time of payment}_{: On maturity of draft}

• _{Goods available to buyers}_{: Before payment} • _{Risk to exporter}_{: Relies on buyer to pay}

• _{Risk to importer}_{: Relies on exporter to ship}

goods as described in documents

Method  : Drafts (Bills of Exchange)

• Time drafts (documents against acceptance) : When the shipment has been made, the

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Payment Methods

for International Trade

Method  : Consignments

• _{The exporter retains actual title to the goods}

that are shipped to the importer.

• _{Time of payment}_{: At time of sale to third}

party

• _{Goods available to buyers}_{: Before payment} • _{Risk to exporter}_{: Allows importer to sell}

inventory before paying exporter

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Payment Methods

for International Trade

Method  : Open Accounts

• _{The exporter ships the merchandise and}

expects the buyer to remit payment according to the agreed-upon terms.

• _{Time of payment}_{: As agreed upon}

• _{Goods available to buyers}_{: Before payment} • _{Risk to exporter}_{: Relies completely on buyer}

to pay account as agreed upon

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Trade Finance Methods

_{Accounts Receivable Financing}

– _{An exporter that needs funds immediately may}

obtain a bank loan that is secured by an assignment of the account receivable.

_{Factoring (Cross-Border Factoring)}

– _{The accounts receivable are sold to a third party}

(the factor), that then assumes all the

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Trade Finance Methods

_{Letters of Credit (L/C)}

– _{These are issued by a bank on behalf of the}

importer promising to pay the exporter upon presentation of the shipping documents.

– _{The importer pays the issuing bank the amount of}

the L/C plus associated fees.

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Trade Finance Methods

– _{Sometimes, the exporter may request that a}

local bank confirm (guarantee) the L/C.

 _{Letters of Credit (L/C)}

¤ _{The required documents typically include a}

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Sample Letter of Credit (Confirmation)

Advice Number: BA000000094 Amount: April 17, 2002 Issue Bank Ref: 1234/LMC/5678 US$: Advice Date: 21 March 2002 Beneficiary: ABC Company, Inc. Applicant: XYZ Company, Inc. Expire Date: 21 July 2002

5278 S. Motorized Blvd 25 Rising Sun Way Detroit, MI 48210 Tokyo, Japan 120-113 000-000-0000 +000-0000-0000

We have been requested to advise you of the following letter of credit issued by: First Bank of Japan

123 Cherry Blossom Dr Tokyo, Japan

Please be guided by its terms and conditions and by the following:

Credit is available by negotiation of your draft(s) in duplicate at sight for 100% of invoice value drawn on us accompanied by the following documents:

1. Signed commercial invoice, one (1) original and three (3) copies.

2. Full set ocean bills of lading consigned to the order of First Bank of Japan, Japan notify applicant and marked freight collect.

3. Packing list, two (2) copies.

Evidencing Shipment of: 20,000 motorized tooth brushes FOB San Francisco

Shipment From: Detroit, MI through San Francisco, CA Shipment To: Tokyo, Japan

Partial Shipments not allowed. All banking charges outside Japan are for beneficiary's account. Documents must be presented within 21 days from BILL date.

At the request of our correspondent, we confirm this credit and engage with you that all drafts drawn under and in compliance with the terms of this credit will be duly honored by us.

Please examine this instrument carefully. If you are unable to comply with the terms or conditions, please communicate with your buyer to arrange for an amendment.

Sincerely, Jill Moneybags Account Manager

International Banking Group • Jack and Jill Bank Corp. • P.O. Box 1234 • Detroit, MI 48201

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Documentary Credit Procedure

Buyer (Importer)

 Sale Contract

Seller (Exporter)

 Deliver Goods

 Request for Credit Importer’s Bank (Issuing Bank)  Documents & Claim for

Payment  Present Documents  Deliver Letter of Credit

 Present Documents

 Send Credit

Exporter’s Bank (Advising Bank)

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Trade Finance Methods

– _{Variations include}

• _{standby L/Cs}_{: funded only if the buyer does not pay}

the seller as agreed upon

• _{transferable L/Cs}_{: the first beneficiary can transfer}

all or part of the original L/C to a third party

• _{assignments of proceeds under an L/C}_{: the original}

beneficiary assigns the proceeds to the end supplier

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Trade Finance Methods

_{Banker’s Acceptance (BA)}

– _{This is a time draft that is drawn on and accepted}

by a bank (the importer’s bank). The accepting bank is obliged to pay the holder of the draft at maturity.

– _{If the exporter does not want to wait for payment,}

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Trade Finance Methods

– _{In general, all-in-rates are lower than bank loan}

rates. They usually fall between the rates of short-term Treasury bills and commercial papers.

 _{Banker’s Acceptance (BA)}

¤ _{The bank accepting the drafts charges an}

all-in-rate (interest rate) that consists of the discount rate plus the acceptance

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Life Cycle of a Typical Banker’s Acceptance

8. Pay Discounted Value of BA

1-7 : Prior to BA

1. Purchase Order Importer Exporter 5. Ship Goods Importer’s Bank 2. Apply for L/C 11. Shipping Documents 14. Pay Face Value of BA 10. Sign Promissory Note to Pay

6. Shipping Documents & Time Draft 4. L/C Notification 9. Pay Discounted Value of BA

7. Shipping Documents & Time Draft Exporter’s Bank 3. L/C 12. BA Money Market Investor

13. Pay Discounted Value of BA

16. Pay Face Value of BA

15. Present BA at Maturity

14-16 : When BA matures

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Trade Finance Methods

_{Working Capital Financing}

– _{Banks may provide short-term loans that finance}

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Trade Finance Methods

_{Medium-Term Capital Goods Financing}

(Forfaiting)

– _{The importer issues a promissory note to the}

exporter to pay for its imported capital goods over a period that generally ranges from three to seven years.

– _{The exporter then sells the note, without}

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Trade Finance Methods

_Countertrade

– _{These are foreign trade transactions in which the}

sale of goods to one country is linked to the

purchase or exchange of goods from that same country.

– _{Common countertrade types include barter,}

compensation (product buy-back), and counterpurchase.

– _{The primary participants are governments and}

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Agencies that Motivate

International Trade

• _{Due to the inherent risks of international}

trade, government institutions and the private sector offer various forms of export credit,

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Agencies that Motivate

International Trade

Export-Import Bank of the U.S. (Ex-Imbank)

• _{This U.S. government agency aims to create}

jobs by financing and facilitating the export of U.S. goods and services and maintaining the

competitiveness of U.S. companies in overseas markets.

• _{It offers guarantees of commercial loans,}

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Agencies that Motivate

International Trade

Private Export Funding Corporation (PEFCO)

• _{PEFCO is a private corporation that is owned}

by a consortium of commercial banks and industrial companies.

• _{In cooperation with Ex-Imbank, PEFCO}

provides medium- and long-term fixed-rate financing for foreign buyers through the

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Agencies that Motivate

International Trade

• _{Beyond insurance and financing, the U.S. has}

tax provisions that encourage international trade.

• _{The FSC Repeal and Extraterritorial Income}

Exclusion Act of 2000, which replaced the

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Impact of International Trade Financing Decisions on an MNC’s Value

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               n t t m j t j t j k 1 = 1 , , 1 ER E CF E = Value

E (CF_j,t) = expected cash flows in currency j to be received by the U.S. parent at the end of

period t

E (ER_j,t) = expected exchange rate at which

currency j can be converted to dollars at the end of period t

k = weighted average cost of capital of the parent

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Chapter Review

• _{Payment Methods for International Trade}

– _Prepayments – _{Letters of Credit}

– _{Sight Drafts and Time Drafts} – _Consignments

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Chapter Review

• _{Trade Finance Methods}

– _{Accounts Receivable Financing} – _Factoring

– _{Letters of Credit}

– _{Banker’s Acceptances}

– _{Working Capital Financing}

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Chapter Review

• _{Agencies that Motivate International Trade}

– _{Export-Import Bank of the U.S.}

– _{Private Export Funding Corporation}

– _{Overseas Private Investment Corporation} – _{Other Considerations}

• _{Impact of International Trade Financing on an}