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Financing Foreign Trade

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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Financing Foreign Trade

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  1. Financing Foreign Trade Chapter 15

  2. International Financeis about Risk MitigationorRisk Engineering

  3. Types of Risk • Preshipment - Shipment - Postshipment

  4. The Trade Cycle and Risk

  5. Pre-shipment Risks Port Entry Contract LOADING SHIP Transport Production Process To Port PORT EXPORT CUSTOMS Initial Contact

  6. Transport to Port By ground mode By rail mode By air mode

  7. THE PORT

  8. LOADING THE SHIP

  9. INCOTERMS EXPORTER’S LOADING DOCK Port Entry SHIP Transport Production Process To Port Ex Works FAS FOB

  10. Shipment Risks Ocean Freight is most common mode of transport LOADED SHIP PERILS OF THE SEA Port Of Departure Port Of Arrival

  11. Shipment Risks • Perils of the Sea • Engine Trouble • Ramming • Jettison • Running Aground

  12. Post-Shipment Risk IMPORTER’S WAREHOUSE CUSTOMS Port Of Arrival Transit to Importer FINAL PYMT

  13. PAYMENT TERMS I. PAYMENT TERMS A. Four Principal Means: 1. Cash in advance 2. Open Account 3. Letter of Credit 4. Drafts

  14. 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

  15. 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.

  16. 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.

  17. 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

  18. PAYMENT TERMS 2. Advantages of an L/C to Exporter a. eliminates credit risk and b. pre-shipment risk of order cancellation

  19. 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

  20. 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

  21. 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)

  22. 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)

  23. PAYMENT TERMS 3. Types of Drafts a. sight b. time

  24. 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

  25. 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.

  26. 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.

  27. 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

  28. DOCUMENTS D. INSURANCE 1. Marine Insurance- same name whether ocean or air freight. 2. Insurance Certificate- issued per trip to show proof of insurance

  29. A “Small” Container Ship

  30. 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.

  31. 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.

  32. SHORT-TERMFINANCING TECHNIQUES III. FINANCING TECHNIQUES A. Four Types: 1. Bankers’ Acceptances 2. Discounting the draft 3. Factoring 4. Forfaiting

  33. 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

  34. 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)

  35. 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.

  36. 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

  37. 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.

  38. GOVERNMENT SOURCES 1. Ex-Im Bank Programs: a. Direct loans to exporters b Loan guarantees c. Risk Insurance: Political and commercial insurance

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

  40. 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.

  41. COUNTERTRADE B. When to Use Countertrade 1. with “soft-currency” developing countries 2. when tariffs or quotas prevent trade.

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