Lecture 3 - International Trade, Trade Finance, and Supply Chains

Question 1

All companies must search out suppliers required. Issues to consider in this process include the capability of suppliers to…

Answer 1

1. Produce the product to adequate standards
2. Deliver said products in a timely fashion
3. Work in conjunction on product enhancements and continuous process improvement

Question 2

The two parties to an international trade may:

Answer 2

• live far apart
• speak different religions
• operate in different political environments
• have different religions
• have different standards for honouring obligations

Question 3

Unaffiliated unknown party

Answer 3

A new customer with which company has no historical business relationship

Requires:

• a contract
• protection against nonpayment

Question 4

Unaffiliated known party

Answer 4

A long-term customer with which there is an established relationship of trust and performance

Requires:

• a contract
• possibly some protection against nonpayment

Question 5

Affiliated Party

Answer 5

A foreign subsidiary or business unit of the company

Requires:

• no contract
• no protection against nonpayment

Question 6

Importer preference

Answer 6

1. Exporter ships the goods

2. Importer pays after the goods are received

Question 7

Exporter preference

Answer 7

1. Importer pays for goods

2. Exporter ships the goods after being paid

Question 8

The bank as the Import/Export Intermediary

Answer 8

1. Importer obtains bank’s promise to pay on importer’s behalf
2. Bank promises exporter to pay on behalf of the importer
3. Exporter ships “to the bank” trusting the bank’s promise
4. Bank pays the exporter
5. Bank “give” merchandise to the importer
6. Importer pays the bank

Question 9

International Trade Risks

Answer 9

Two primary risks:

1. currency risk
2. risk of non-completion

• the risk of importer default is present as soon as the financing period begins
• risk is higher for sporadic transactions

Question 10

Role of Government Assistance for Exporters and Export Insurance

Answer 10

• often countries support their exporters with special financial institutions that offer
• -> subsidized credit in some form
• -> insurance
• -> loans are sometimes offered to the importers to buy exported goods/services from their country
• In Canada, there is a Federal Business Development Bank

Question 11

Trade Documentation

Answer 11

• to facilitate international trade, special banking arrangements and documentation have been developed

Question 12

Three Key Documents

Answer 12

• Letter of Credit
• Draft
• Bill of Lading

Question 13

Other Trade Documents

Answer 13

• Packing lists describing the containers and contents
• Insurance against damage and theft during transportation
• Consular Invoice exporter must file with importing country customs office
• Certificate of Analysis assuring shipment meets certain standards of purity, weight, or other measurable characteristics

Question 14

Letter of Credit

Answer 14

• Instrument issued by a bank, at importers’ request, in which the bank promises to make payment on behalf of the importer
• As if the exporter is selling to the bank, but is still shipping to the importer
• Bank promise to pay will be activated by presentation of documents, rather than by arrival of goods
• Can be revocable/irrevocable
• Can be confirmed/unconfirmed

Question 15

Revocable/Irrevocable

Answer 15

• Revocable can be cancelled/amended so a means of arranging rather than guaranteeing payment

Question 16

Confirmed/Unconfirmed

Answer 16

• Confirmed by a domestic bank that takes on the obligation of the issuing foreign bank vs. unconfirmed is only an obligation of the foreign issuing bank
• A confirmed L/C is issued by one bank and can be confirmed by another bank, in which case the confirming bank can honour drafts drawn in compliance with the L/C

Question 17

Bill of Lading

Answer 17

• issued tot he exporter by a carrier transporting the merchandise indicating the carrier has received the goods
• specifies shipping arrangements and charges including:
• -> kind and quantity of goods being shipped
• -> identity of shipper or “consignor” and importer or “consignee”
• -> ports of loading and discharge
• -> shipping costs
• documents the transfer of title from the exporter to the bank if it its of the “negotiable” type
• must be shown to initiate payment on the L/C

Question 18

Draft (Invoice)

Answer 18

• bill of exchange or invoice, is the instrument used to effect payment
• on a “sight” draft, there is immediate payment
• “time” draft, allows for a delay in payment for an amount of time
• If a time draft is accepted by a bank it is a bankers acceptance
• a BA can be like a certificate of deposit, since the bank is obligated to pay on a set date…these can be sold as negotiable instruments

Question 19

Steps in a typical trade transaction

Answer 19

• the importer and exporter each have their own banks
• the accepted draft is a “time draft” or BA
• the exporter’s bank sells the BA to an investor

Question 20

Documentary Collections vs. Letters of Credit

Answer 20

• Letters of Credit: involve importers (buyers) bank agreeing to accept the commitment to pay for a transaction if the items are shipped as promised (proven by the bill of lading) and they receive notification of an invoice (draft) requesting payment from the importer
• Documentary Collection: where the importers bank does NOT guarantee payment but only provides assistance to the exporter and importer in completing the transaction through handling documents and assisting in the collection of payment

Question 21

Incoterms

Answer 21

• Standard, codified definition of the rights and obligations of buyers and sellers in international transactions that clearly identify:
• -> who will bear the costs of carriage?
• -> at what point does the transfer of risk occur
• -> who is responsible for the inbound and outbound customs facilities

Question 22

Free on Board

Answer 22

Applies to ocean or inland waterway transport, means that the seller clears the goods for export and ensures they are delivered to and loaded onto the vessel for transport a the named point of departure. The sellers’ obligations end when the goods have been loaded onto the ship

Question 23

Alternative for Financing Trade Receivables

Answer 23

• Bankers’ Acceptances
• Trade acceptances
• Factoring
• Securitization
• Bank credit lines
• Commercial paper

Question 24

Bankers acceptances

Answer 24

• called a “trade acceptance” if the accepting entity is a commercial firm rather than a bank
• Cost of financing a receivable with a BA depends on:
• -> the yield, like a MM rate
• -> the commission the bank charged to accept the draft
• Company can choose wither to:
• -> wait until the payment date and receive the future value less the acceptance fee at the time:
• -> sell or “discount” the BA to get the funds immediately
• -> best alternative on the firms’ opportunity cost of funds and on the discount they will be charged to get the money right away

Question 25

Factoring

Answer 25

• Factors’ are specialized firms that purchase receivables at a discount
• -> non recourse basis = factor assumes the credit, political, and foreign exchange risk of the purchased receivable
• -> recourse basis means the factors give back receivables that are not collectible
• Factors charge a commission of about 1.5-2.5% and also deducts interest as a discount from the initial proceeds

Question 26

Securitization

Answer 26

• The firm sells their export receivables to a legal entity that creates marketable securities based on the package of individual export receivables
• Sells the receivables without recourse so they come off the balance sheet
• size of discount?
• -> historic collection risk of the exporter
• -> nature of the receivables
• -> cost of credit insurance
• -> size of the financing and service fees

Question 27

Forfeiting

Answer 27

• a way to eliminate the risk of non payment by customers perceived to be too risky for regular accounts credit
• the exporter sells receivables at a discount to a “forfeiter” PRIOR to the transaction taking place
• the forfeiter is a country or industry risk specialist who has to assess the customer and approve the sale