Managing Financial and Commercial Risks in Trade Transactions

1. Managing Financial and Commercial Risks in Trade Transactions

2. Buyer’s and Seller’s Objectives in Global Trade • Both have a vested interest in closing the transaction, • but there is an inherent conflict in objectives • Buyer wants to delay payment as long as possible • Until… • Receipt and Processing of Goods • Sale of Goods • Collection of Receivables • Seller wants payment as soon as possible • At... • Contract Signing, or • At Time of Shipment

3. Key Functions to Consider in Global Trade • A structuring of payment terms between Buyers and Sellers • Properly structured, trade finance provides an orderly, cost effective and secure method of assuring satisfaction to all parties in a trade transaction • Mitigation or reduction of financial and commercial risks • Availability of financing for the exporter and importer

4. Warning to Exporters! • Don’t assume that your trading partners understand the proper use of the conventional customs, practices, obligations, risks and costs that drive the global trade transaction • Do assume that they are ready, willing and able to exploit the innocent or unknowing U.S. exporter • Know the Rule of Law • Don’t leave your judgement at the border

5. Methods of Payment • Cash in Advance • Letter of Credit • Documentary Collection • Open Account

6. Credit Risks: Liquidity Financial Difficulties Disputes Intentional Delay Fraud Country Risks: Access to Foreign Exchange Stable FX Environment Import Restrictions Political unrest Expropriation The Basic Question: Will My Customer Pay Me on Time?

7. Country Risk • A measure of the abilityand willingnessof the country’s central bank to make foreign currency available to service debt • Anything and everything that will alter the ability and/or willingness of the obligor to pay • A measurement that is both an art and a science

8. Debt service Political outlook Economic outlook Reserves & current account Access to capital markets Income distribution Trade balance Foreign direct investment Fiscal policy Inflow of portfolio investments Domestic savings rate As a Science Look at the major macroeconomic data:

9. As an Art • Quality and transparency of public and private sector data and financial information • Degree of government intervention in capital allocation and fixing of FX rate • Level of corruption, cronyism • Independence of central bank • Quality of bank oversight and regulations • Effectiveness of legal system

10. How Can Banks Broadly Help Exporters? • “Financial Supply Chain” Assistance • Working Capital Facilities • Pre and Post Export Working Capital Facilities • International Cash Management Services • Cross-Border Risk Mitigation Products

11. How Can Banks Specifically Help Exporters? • Export Letters of Credit • Standby Letters of Credit • Documentary Collections • Foreign Exchange • Export Receivable Insurance • Export-Import Bank of the U.S. Working Capital Guarantee Program • Small Business Administration Working Capital Guarantee Program • Internet-Based Electronic Delivery Systems

12. International Risk Management Considerations

13. Sales Contract Pro-Forma Invoice or Purchase Order should indicate: • Description of goods, quantity and unit price • Ex-Works Value of Goods • The appropriate Incoterms and any additional charges • Payment Terms • Sales Contract transmitted by • Fax • Email • Verbal Agreement • Formal Agreement

14. Export Pricing Considerations • Domestic: • Cost of Merchandise • Export, add: • Export Packing • Inland Freight • International Freight • Insurance Premiums • Banking Fees • Forwarder’s Fees • Consular Fees

15. Export Documentation • Documentation is the engine that drives global trade • Documentation facilitates – the movement of freight – transfer of title – processing of payment – customs clearance

16. Role of the Freight Forwarder “Physical Supply Chain” Assistance • Exporter’s agent in moving cargo to buyer’s destination • Should be familiar with: • Import Rules and Regulations of Foreign Countries • U.S. Government Export Regulations • Trade Documents • Incoterms

17. Common Shipping Documents • Commercial Invoice • Bill of Lading • Packing List • Certificate of Origin • Insurance Certificate • Inspection Certificate • Consular Invoice

18. Incoterms

19. Incoterms 2000 • Most commonly used pricing terms that deal with the relation between seller and buyer under the sales contract • Incoterms address: • the seller’s transport obligation and transfer of title to the buyer • the party responsible for the contract of carriage and cost of carriage • the party responsible for the contract of insurance and cost of insurance • Critical to the success of the transaction • Incoterms are published by the International Chamber of Commerce

20. Export Pricing Considerations • Domestic: • Cost of Merchandise • Export, add: • Export Packing • Inland Freight • International Freight • Insurance Premiums • Banking Fees • Forwarder’s Fees • Consular Fees

21. Incoterms 2000 • EXW Ex Works • FCA Free Carrier • FAS Free Along Side • FOB Free On Board • CFR Cost and Freight • CIF Cost, Insurance, and Freight • CPT Carriage Paid To • CIP Carriage and Insurance Paid To • DAF Delivered at Frontier • DES Delivered Ex Ship • DEQ Delivered Ex Quay • DDU Delivered Duty Unpaid • DDP Delivered Duty Paid