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TRADE FINANCE - who bears the risk in foreign trade transactions? MECHANISM OF EXPORTING AND IMPORTING TRANSACTIONS

TRADE FINANCE - who bears the risk in foreign trade transactions? MECHANISM OF EXPORTING AND IMPORTING TRANSACTIONS - involves one or more financial intermediaries introduced by A LETTER OF CREDIT (L/C)

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TRADE FINANCE - who bears the risk in foreign trade transactions? MECHANISM OF EXPORTING AND IMPORTING TRANSACTIONS

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  1. TRADE FINANCE - who bears the risk in foreign trade transactions? MECHANISM OF EXPORTING AND IMPORTING TRANSACTIONS - involves one or more financial intermediaries introduced by A LETTER OF CREDIT (L/C) - L/C = a letter addressed to the seller, written and signed by a bank ("issuing bank") acting on behalf of the buyer In a L/C, the bank promises the exporter it will honour drafts drawn on itself, provided that the exporter has complied with specific conditions and furnished the required documents as set forth in the terms of the credit.

  2. COMMERCIAL L/C (1) The buyer asks his local bank to open an L/C in a set amount for payment on a set date to the foreign exporter. (LOCAL BANK = ISSUING BANK) (2) The i.bank asks a bank (=advising bank) in exporter's home country to notify the exporter that the credit has been opened. “The exporter now has i.bank's commitment to pay her when she makes a shipment.” (3) If requested, the advising bank provides the exporter its guarantee or "confirmation" for a fee to be charged to the importer. NOW THE L/C IS A CONFIRMED L/C. (4) The confirming bank bears all the risk (inability to pay by the i.bank or the importer).

  3. REVOCABLE L/C----> can be cancelled by the buyer up to shipment and credit negotiation IRREVOCABLE L/C----> cannot be cancelled by the buyer A confirmed irrevocable L/C gives maximum coverage for the exporter The exporter is required to negotiate (i.e. present the specified documents for collection) directly with the confirming bank (or indirectly through her local bank)---usual case NEGOTIABLE L/C The exporter has the right to present the documents for collection at any bank A TRANSFERABLE L/C Transferable with proper documents; Used by the exporter who is a broker working for a manufacturer THE BROKER TRANSFERS AN L/C TO THE MANUFACTURER FOR COMMISSIONS

  4. DOCUMENTATION FOR AN L/C -------> BILL OF LADING (B/L, BLADING)B/L issued by the shipping carrier 3 FUNCTIONS OF B/L: - a contract between the carrier and the exporter for shipment of goods - exporter's receipt for the goods - establishes control over the goods moved in transit DIFFERENT TYPES OF B/L - "RECEIVED FOR SHIPMENT" B/L - "ON-BOARD" B/L ---> certifies the goods actually received and loaded on board the named vessel - "CLEAN" B/L ---> goods received in apparently good condition - "FOULED" B/L ---> goods received in poor condition

  5. Buyers require that only clean on-board bills of lading be negotiable under the terms of the L/C L/C OFTEN REQUIRES OTHER DOCUMENTS FOR CREDIT NEGOTIATION: The exporter's commercial invoice (Goods shipped, prices, amount owed by the buyer, etc.) Insurance certificate Consular invoice: required by the importing country, obtained from the consular rep in the exporting country for a fee FOR BULK COMMODITY SHIPMENTS, certificate of inspection is required: issued by an independent inspection firm which samples shipped goods and provides product characteristics vis-à-vis the required characteristics by the L/C

  6. EXAMPLE Protein content of soybean meal; mineral composition of iron ore Characteristics not up to the required standard ---> L/C not negotiable HOWEVER, Buyer may waive the requirement in return for a discount from the exporter CONTRACT AND L/C MAY HAVE A SLIDING PAYMENT SCALE DRAFT SURVEY: Statement of the weight of the bulk cargo loaded aboard a maritime vessel by an impartial surveyor who must estimate the weight by the vessel characteristics and visual inspection of how high it rides in the water before and after the cargo has been loaded ---> Estimates quite accurate ----> commercial invoice based on the survey weight

  7. Government financing for international trade: governments provide many types of trade finance/insurance subsidies The OECD provides guidelines on export financing for its member countries. Many developed countries mix "exporting" with "foreign aid" in their trade dealings with developing nations. (called “tied aid")

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