1 Financing Foreign Trade Chapter 15

2 International Finance is about Risk Mitigation or Risk Engineering

3 Types of Risk Preshipment - Shipment - Postshipment Preshipment - Shipment - Postshipment

4 The Trade Cycle and Risk

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

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

7 THE PORT

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9 LOADING THE SHIP

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

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

14 Shipment Risks Perils of the Sea Perils of the Sea Engine Trouble Engine Trouble Ramming Ramming Jettison Jettison Running Aground Running Aground

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

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

17 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

18 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.

19 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.

20 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 * Not an advantage to the exporter

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

22 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

23 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

24 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)

25 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)

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

27 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

28 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 overgoods if negotiable type.

29 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.

30 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 board DDP: Delivered duty paid - exporter has most liability DDP: Delivered duty paid - exporter has most liability

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

32 A “Small” Container Ship

33 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.

34 Example of General Average Liability 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 A1 5$250,0000 B4 20$20,000 $50,000 C15 75$150,000$187,500 Total: 20 containers at risk when ship set sail.

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

36 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

37 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 with recourse (exporter still liable) or without recourse(bank takes liability for nonpayment)

38 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.

39 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

40 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.

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

42 GOVERNMENT SOURCES 2. Ex-Im Restrictions:  At least 51% U.S. content  No armaments  Must be environmentally friendly to both countries

43 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.

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