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Foundations of Multinational Financial Management 5 th Edition Alan Shapiro J.Wiley & Sons

Foundations of Multinational Financial Management 5 th Edition Alan Shapiro J.Wiley & Sons. Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton. Financing Foreign Trade. Chapter 18. The Trade Cycle and Risk. Types of Risk. Preshipment Shipment Postshipment.

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Foundations of Multinational Financial Management 5 th Edition Alan Shapiro J.Wiley & Sons

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  1. Foundations of Multinational Financial Management5th EditionAlan Shapiro J.Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton

  2. Financing Foreign Trade Chapter 18

  3. The Trade Cycle and Risk

  4. Types of Risk • Preshipment • Shipment • Postshipment

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

  6. 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

  7. PAYMENT TERMS • C. Letter of Credit (L/C) • 1. A letter addressed to seller • a. Written and signed by buyer’s bank • b. Promising to honor seller’s drafts. • c. Bank substitutes its own commitment • *d. Seller must conform to terms

  8. PAYMENT TERMS • 2. Advantages of an L/C to Exporter • a. Eliminates credit risk • b. Preshipment risk protection

  9. PAYMENT TERMS • 3. Advantages of L/C to Importer • a. Shipment assured. • b. Documents inspected. • c. May allow better sales terms. • d. Relatively low-cost financing. • e. Easy cash recovery if discrepancies arise.

  10. PAYMENT TERMS • 4. Types of L/Cs • a. Documentary • b. Irrevocable • c. Confirmed

  11. PAYMENT TERMS • D. DRAFTS • 1. Definition: • - Unconditional order in writing • - Exporter’s order for importer to pay • - At once (sight draft) or • - In future (time draft)

  12. 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. May be converted to a banker’s acceptance)

  13. PAYMENT TERMS • 3. Types of Drafts • a. Sight • b. Time

  14. PAYMENT TERMS • F. 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.

  15. PAYMENT TERMS • 4. Benefits of Open Accounts: • a. Greater flexibility in making a trade. • b. Lower transactions costs. • 5. Major disadvantage: • - Highly vulnerable to government currency controls.

  16. 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

  17. 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.

  18. DOCUMENTS • C. COMMERCIAL INVOICE • Purpose: • 1. Lists full details of goods shipped • 2. Names of importer/exporter given • 3. Identifies payment terms • 4. List charges for transport and insurance.

  19. DOCUMENTS • D. INSURANCE • 1. Two Categories: • a. Marine: transport by sea • b. Air: transport by air • 2. Insurance Certificate issued to show proof of insurance.

  20. SHORT-TERMFINANCING TECHNIQUES • III. FINANCING TECHNIQUES • A. Four Types: • 1. Bankers’ Acceptances • a. Creation: drafts accepted • b. Terms: Payable at maturity to holder

  21. SHORT-TERMFINANCING TECHNIQUES • 2. Discounting • a. Converts exporters’ drafts to cash • minus interest to maturity and • commissions. • b. Low cost financing with few fees. • c. May be with (exporter still liable) or without recourse (bank takes • liability for nonpayment).

  22. SHORT-TERMFINANCING TECHNIQUES • 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.

  23. SHORT-TERMFINANCING TECHNIQUES • 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

  24. 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.

  25. GOVERNMENT SOURCES • 1. Ex-Im Bank Programs: • a. Direct loans to exporters • b. Intermediate loans to exporters • c. Loan guarantees • d. Preliminary commitments • e. Political and commercial insurance

  26. GOVERNMENT SOURCES • Restrictions: • At least 51% U.S. content • No armaments • Must be environmentally friendly

  27. 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.

  28. COUNTERTRADE • B. When to Use Countertrade • 1. With “soft-currency” developing countries. • 2. When tariffs or quotas prevent • trade.

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